Optimal fiscal policy without commitment: Revisiting Lucas-Stokey

Davide Debortoli, Ricardo Nunes and Pierre Yared

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not necessarily tax above the peak of the La er curve, even if it is ex-ante optimal to do so.

Keywords: Public debt; optimal taxation; fiscal policy (search for similar items in EconPapers)
JEL-codes: E62 H21 H63 (search for similar items in EconPapers)
Date: 2019-02, Revised 2020-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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Related works:
Journal Article: Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey (2021)
Working Paper: Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1687

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