Debt Restructuring and the Time Consistency of Optimal Policies

Miquel Faig

Journal of Money, Credit and Banking, 1994, vol. 26, issue 2, 171-81

Abstract: Clever debt restructuring ensures that the optimal taxes on the purchase of consumption goods and on labor income are time consistent even if the government chooses public consumption and public investment. For this result, two types of debt are needed: claims on consumption goods (debt indexed by the gross-of-tax consumption prices) and claims on leisure (debt indexed by the net-of-tax wage rate). This rescues Robert E. Lucas and Nancy L. Stokey (1983) from the criticism that debt restructuring cannot ensure time consistency when the government chooses public consumption or public investment. This paper analyzes a closed economy. Copyright 1994 by Ohio State University Press.

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:26:y:1994:i:2:p:171-81

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