EconPapers    
Economics at your fingertips  
 

Recurrent default or policy-optimal taxation

Mark A. Roberts ()
Additional contact information
Mark A. Roberts: The University of Nottingham

Economic Change and Restructuring, 2017, vol. 50, issue 3, No 6, 279-297

Abstract: Abstract This paper investigates the syndrome of “this time is different” with respect to Reinhart and Rogoff’s (This time is different: eight centuries of financial folly Princeton University Press, Princeton, 2011) interpretation of their extensive, historical data on financial default, and with particular regard to public debt in a closed-economy. Recurrent and over-generous promises to credulous investors of an ex ante, policy-optimal return amounts to an extra policy instrument in boosting the demand for public debt. In a numerical simulation of a version of the Diamond (Am Econ Rev 55:1126–1150, 1965) model, we find that the incentive for the policy-maker to pursue this strategy is trivial if taxes can be set at a policy-optimal level, but possibly over-riding if they cannot. Thus, the main result lines up with the empirical conclusion of Reinhart et al. (Debt intolerance. Debt intolerance, 2003) that “debt intolerant countries have weak fiscal structures”. The subsidiary result of the model is that defaulting countries will also have higher shares of public expenditure. Thus the model also predicts Wagner’s Law to the extent that fiscal structure is correlated with economic development.

Keywords: Public debt; Unanticipated inflation; Dynamically-consistent; Instrument; Wagner’s Law (search for similar items in EconPapers)
JEL-codes: E61 H63 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10644-017-9211-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
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:kap:ecopln:v:50:y:2017:i:3:d:10.1007_s10644-017-9211-8

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/10644/PS2

DOI: 10.1007/s10644-017-9211-8

Access Statistics for this article

Economic Change and Restructuring is currently edited by George Hondroyiannis

More articles in Economic Change and Restructuring from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2025-03-19
Handle: RePEc:kap:ecopln:v:50:y:2017:i:3:d:10.1007_s10644-017-9211-8