Optimal Public Debt Consolidation with Distributional Conflicts

26 Pages Posted: 7 Oct 2016

See all articles by Roberta Cardani

Roberta Cardani

European Commission Joint Research Center - JRC-Ispra, European Commision

Lorenzo Menna

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Patrizio Tirelli

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS); Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Date Written: October 5, 2016

Abstract

In this paper, we adopt a Ramsey-optimal approach to the identification of debt reduction strategies, that is, the optimal policy mix for labor and capital income taxes, public expenditures and inflation designed to achieve an exogenous debt reduction path. Our model accounts for monopoly profits, limited asset market participation and asset holders' infrequent optimization of their portfolio composition between money holdings and other financial assets. The optimal policy envisages persistent reductions in public consumption and increases in taxes and inflation. Distributional conflicts arise between asset owners and the rest of the population. When asset holders interests are relatively less important in the planner's objective function, labor income taxes are drastically reduced whereas capital income taxes and inflation are increased. Just in this case the consolidation has short term expansionary effects.

Keywords: Fiscal Consolidation, Limited Asset Market Participation, Ramsey Fiscal Policy

JEL Classification: E32, E62, E63

Suggested Citation

Cardani, Roberta and Menna, Lorenzo and Tirelli, Patrizio, Optimal Public Debt Consolidation with Distributional Conflicts (October 5, 2016). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 350. Available at SSRN: https://ssrn.com/abstract=2848759 or http://dx.doi.org/10.2139/ssrn.2848759

Roberta Cardani

European Commission Joint Research Center - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

Lorenzo Menna

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Patrizio Tirelli (Contact Author)

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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