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Fiscal Policy, Debt Constraint and Expectation-Driven Volatility

Kazuo Nishimura (), Thomas Seegmuller () and Alain Venditti ()

No 1437, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectation-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.

Keywords: Indeterminacy; endogenous cycles; public debt; income taxation (search for similar items in EconPapers)
JEL-codes: E32 H20 H68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
Date: 2014-06
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Related works:
Journal Article: Fiscal policy, debt constraint and expectations-driven volatility (2015) Downloads
Working Paper: Fiscal policy, debt constraint and expectations-driven volatility (2015)
Working Paper: Fiscal Policy, Debt Constraint and Expectation-Driven Volatility (2014) Downloads
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