Fiscal Policy and Debt Management with Incomplete Markets

Thomas Sargent, Mikhail Golosov, David Evans and Anmol Bhandari
Additional contact information
David Evans: University of Oregon
Anmol Bhandari: university of minnesota

No 1284, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an environment with incomplete markets. We develop a method that uses second order approximations of the policy functions to the planner’s Bellman equation to obtain expressions for the unconditional and conditional moments of debt and taxes in closed form such as the mean and variance of the invariant distribution as well as the speed of mean reversion. Using this, we establish that asymptotically the planner’s portfolio minimizes an appropriately defined measure of fiscal risk. Our analytic expressions that approximate moments of the invariant distribution can be readily applied to data recording the primary government deficit, aggregate consumption, and returns on traded securities. Applying our theory to U.S. data, we find that an optimal target debt level is negative but close to zero, that the invariant distribution of debt is very dispersed, and that mean reversion is slow.

Date: 2016
New Economics Papers: this item is included in nep-dge and nep-pbe
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Citations: View citations in EconPapers (14)

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Journal Article: Fiscal Policy and Debt Management with Incomplete Markets (2017)
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