Managing government debt

Wei Jiang, Thomas Sargent, Neng Wang and Jinqiang Yang
Additional contact information
Wei Jiang: a Department of Industrial Engineering and Decision Analytics , Hong Kong University of Science and Technology , Hong Kong 999077 , China
Neng Wang: f Graduate School of Business , Columbia University , New York , NY 10027
Jinqiang Yang: g School of Finance , Shanghai University of Finance and Economics , Shanghai 200433 , China

Proceedings of the National Academy of Sciences, 2024, vol. 121, issue 11, e2318365121

Abstract:

To construct a stochastic version of [R. J. Barro, J. Polit. Econ. 87 , 940–971 (1979)] normative model of tax rates and debt/GDP dynamics, we add risks and markets for trading them along lines suggested by [K. J. Arrow, Rev. Econ. Stud. 31 , 91–96 (1964)] and [R. J. Shiller, Creating Institutions for Managing Society’s Largest Economic Risks (OUP, Oxford, 1994)]. These modifications preserve Barro’s prescriptions that a government should keep its debt-gross domestic product (GDP) ratio and tax rate constant over time and also prescribe that the government insure its primary surplus risk by selling or buying the same number of shares of a Shiller macro security each period.

Keywords: tax smoothing; Ricardian equivalence; risk premium (search for similar items in EconPapers)
Date: 2024
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