Public Debt and Redistribution with Borrowing Constraints

35 Pages Posted: 27 Feb 2013

See all articles by Tommaso Monacelli

Tommaso Monacelli

Bocconi University - Department of Economics

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

Date Written: February 2013

Abstract

We build a model with financial imperfections and heterogeneous agents and analyse the effects of two types of fiscal policy: revenue‐neutral, intratemporal redistribution; and debt‐financed tax cuts, which we interpret as intertemporal redistribution. Under flexible prices, the two policies are either neutral or display effects that are at odds with the empirical evidence. With sticky prices, Ricardian equivalence always fails. A Robin Hood, revenue‐neutral redistribution to borrowers is expansionary on aggregate activity. A uniform, debt‐financed tax cut has a positive present‐value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.

Suggested Citation

Monacelli, Tommaso and Perotti, Roberto, Public Debt and Redistribution with Borrowing Constraints (February 2013). The Economic Journal, Vol. 123, Issue 566, pp. F64-F98, 2013. Available at SSRN: https://ssrn.com/abstract=2225646 or http://dx.doi.org/10.1111/ecoj.12012

Tommaso Monacelli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Roberto Perotti

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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