Debt Non-Neutrality, Policy Interactions, and Macroeconomic Stability

Ludger Linnemann and Andreas Schabert
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Ludger Linnemann: University of Cologne

No 05-077/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We study the consequences of non-neutrality of government debt for macroeconomic stabilization policy in an environment where prices are sticky. Assuming transaction services of government bonds, Ricardian equivalence fails because public debt has a negative impact on its marginal rate of return and thus on private savings. Stability of equilibrium sequences requires a stationary evolution of real public debt, which steers inflation expectations and rules out endogenous fluctuations. Under anti-inflationary monetary policy regimes, macroeconomic fluctuations tend to decrease with the share of tax financing, which justifies tight debt constraints. In particular, a balanced budget policy stabilizes the economy under cost-push shocks, such that output and inflation variances can be lower than in a corresponding case where debt is neutral.

Keywords: Government debt; fiscal and monetary policy rules; stabilization policy; equilibrium uniqueness (search for similar items in EconPapers)
JEL-codes: E32 E52 E63 (search for similar items in EconPapers)
Date: 2005-08-03
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: DEBT NONNEUTRALITY, POLICY INTERACTIONS, AND MACROECONOMIC STABILITY (2010)
Working Paper: Debt Non-Neutrality, Policy Interactions, and Macroeconomic Stability (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20050077

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