Debt and Deficit Fluctuations and the Structure of Bond Markets

Albert Marcet and Albert Scott

No 332, Working Papers from Barcelona School of Economics

Abstract: We analyse the implications of optimal taxation for the stochastic behaviour of debt. We show that when a government pursues an optimal fiscal policy under complete markets, the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase. By contrast, under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit. Data for US government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness.

Keywords: Complete vs incomplete markets; Debt Management; Fiscal Deficits; Government Debt; Optimal fiscal policy; Tax smoothing (search for similar items in EconPapers)
JEL-codes: E62 H62 H63 (search for similar items in EconPapers)
Date: 2007-09
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Debt and Deficit Fluctuations and the Structure of Bond Markets (2015)
Journal Article: Debt and deficit fluctuations and the structure of bond markets (2009)
Working Paper: Debt and Deficit Fluctuations and the Structure of Bond Markets (2007)
Working Paper: Debt and deficit fluctuations and the structure of bond markets (2003)
Working Paper: Debt and Deficit Fluctuations and the Structure of Bond Markets (2001)
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