Government Debt Limits and Stabilization Policy

27 Pages Posted: 14 Jul 2020 Last revised: 30 Mar 2021

See all articles by Daniel Murphy

Daniel Murphy

University of Virginia - Darden School of Business

Eric R. Young

University of Virginia

Multiple version iconThere are 2 versions of this paper

Date Written: November 9, 2020

Abstract

We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954) while the central bank finances government spending with money when the economy is at the effective lower bound.

Keywords: government debt limits, zero lower bound, stabilization policy, inefficiency

JEL Classification: E52, E58, E63

Suggested Citation

Murphy, Daniel and Young, Eric R., Government Debt Limits and Stabilization Policy (November 9, 2020). Darden Business School Working Paper No. 3631178, Available at SSRN: https://ssrn.com/abstract=3631178 or http://dx.doi.org/10.2139/ssrn.3631178

Daniel Murphy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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