Government Debt Bias

Michael Kumhof and Irina Yakadina
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Irina Yakadina: International Monetary Fund

IMF Economic Review, 2017, vol. 65, issue 4, No 1, 675-703

Abstract: Abstract Almost all governments issue large stocks of debt. Optimal taxation theory typically concludes that they should hold large stocks of assets. To reconcile facts and theory, we introduce two simple modifications into an otherwise standard optimal taxation model with commitment: government impatience and continuous debt limits. Two results are obtained. First, positive government debt is optimal for even minimal government impatience. Second, the optimality of negative government debt disappears even without impatience if discrete debt limits are replaced by very wide but continuous debt limits. We go on to quantify the implications for debt, interest rates and business cycle dynamics.

Keywords: E61; E62 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1057/s41308-017-0035-3

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