Debt Stabilization in a Non-Ricardian Economy

Simon Wren-Lewis and Campbell Leith and Ioana Moldovan
Authors registered in the RePEc Author Service: Ioana R. Moldovan () and Campbell Leith

No 542, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: In models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk. This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker's rate of time preference such that it may be optimal to reduce debt today to reduce distortionary taxation in the future. Moreover, the level of the capital stock (and therefore output and consumption) in these economies is likely to be sub-optimally low, and reducing government debt will 'crowd in' additional capital. Using an elaborated version of the model of perpetual youth developed by Blanchard (1985) and Yaari (1985), we derive the optimal steady state level of government assets. We show how and why this level of government assets falls short of the level of debt that achieves the optimal capital stock and the level that eliminates income taxes.

Keywords: Non-Ricardian consumers; Macroeconomic stability; Distortionary taxes (search for similar items in EconPapers)
JEL-codes: E21 E32 E63 (search for similar items in EconPapers)
Date: 2011-03-01
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://ora.ox.ac.uk/objects/uuid:37b82348-f01a-458d-801c-89ca49ed82c9 (text/html)

Related works:
Journal Article: DEBT STABILIZATION IN A NON-RICARDIAN ECONOMY (2019)
Working Paper: Debt stabilization in a Non-Ricardian economy (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:542

Access Statistics for this paper

More papers in Economics Series Working Papers from University of Oxford, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Anne Pouliquen ( this e-mail address is bad, please contact ).