Procyclical Debt as Automatic Stabilizer

Dennis Wesselbaum

Working papers from Banque de France

Abstract: This paper shows that government debt creates a so far neglected wealth effect that has sizable effects on business cycle fluctuations. We present a new channel through which governments can influence cyclical fluctuations generated by any type of shock and contribute to macroeconomic stability. We provide evidence for the United States that debt moves procyclical with output. Then, we build a Real Business Cycle model with Non-Ricardian agents and use rules to describe fiscal policy. We show that procyclical debt generates smaller fluctuations compared to countercyclical debt. The striking consequence is that classical Keynesian fiscal policy destabilizes the business cycle in our framework.

Keywords: Debt; Fiscal Rules; Non-Ricardian Agents; SVAR. (search for similar items in EconPapers)
JEL-codes: E32 E62 H3 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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https://publications.banque-france.fr/sites/defaul ... g-paper_444_2013.pdf (application/pdf)

Related works:
Journal Article: Procyclical Debt as Automatic Stabilizer (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:444

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