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IDIOSYNCRATIC RISK AND ACYCLICALLY INCREASING PUBLIC DEBT

Insook Lee ()
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Insook Lee: Beijing Normal University, 18 Jinfeng Road, Tangjiawan, Xiangzhou District, Zhuhai, Guangdong 519087, P. R. China

The Singapore Economic Review (SER), 2021, vol. 66, issue 05, 1177-1203

Abstract: Observed public debt of developed economies is not only countercyclical but also acyclically increasing for fairly long peacetime. This paper proposes a politico-economic theory of public debt which coherently rationalizes both acyclical and countercyclical behaviors of public debt. An office-seeking policymaker decides fiscal policies to win over finitely-lived voters who face uninsurable idiosyncratic risk on their disposable incomes. The equilibrium public debt is (i) acyclically increasing, or (ii) countercyclical, or (iii) acyclically decreasing. An increase in the idiosyncratic risk can change public debt behavior to acyclically increasing from countercyclical, entailing rises in public debt.

Keywords: Government debt; cyclicality of public debt; idiosyncratic risk; acyclical public debt (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0217590820500368

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