Sustaining Ramsey plans with one-period bonds

Begoña Domínguez

Economic Theory, 2020, vol. 70, issue 2, No 2, 387-410

Abstract: Abstract Governments issue bonds that affect the choices of future governments. If carefully chosen, the debt structure can make the optimal fiscal policy plan time consistent, as shown by Lucas and Stokey (J Monet Econ 12(1):55–93, 1983). Yet the implementation of this method requires governments to solve high-dimensionality debt issuance problems and to commit to honor all debt payments even for very long maturities. This paper characterizes the Markov-perfect policy with only one-period bonds. I show that, with enough variety of one-period bonds, the optimal bond issuance makes the Markov-perfect policy plan coincide with the Ramsey policy plan. I establish these results for a general policy problem, which encompasses models such as that of Lucas and Stokey (1983), as well as economies with physical capital and an implementation lag on capital taxation.

Keywords: Optimal policy; Taxes; Time consistency; Debt structure (search for similar items in EconPapers)
JEL-codes: E61 E62 H21 H62 H63 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00199-019-01212-9

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