Towards a Political-Economic Theory of Domestic Debt

Allan Drazen
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Allan Drazen: University of Maryland

Chapter 6 in The Debt Burden and its Consequences for Monetary Policy, 1998, pp 159-178 from Palgrave Macmillan

Abstract: Abstract There is a large literature on why countries choose to issue debt rather than financing expenditures by current taxation. If Ricardian equivalence holds and taxes are non-distortionary, then it doesn’t matter whether government expenditures are financed by debt or taxes. When taxes are distortionary, debt can be used to smooth taxes and the associated distortions when the desired path of government expenditures is not smooth (Barro, 1979). In the absence of Ricardian equivalence, issuing debt rather than levying taxes may reflect short run stabilization considerations. The choice of whether to use taxes or debt may well also reflect concerns about the effects on private investment and capital accumulation, with debt possibly crowding out private capital accumulation, as in Diamond (1965). A government may also issue debt in order to influence or constrain the decisions of future governments (Lucas and Stokey, 1983; Persson and Svensson, 1989).2

Keywords: Monetary Policy; Government Spending; Government Debt; Foreign Debt; Domestic Saving (search for similar items in EconPapers)
Date: 1998
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DOI: 10.1007/978-1-349-26077-5_6

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