Public Debt and Redistribution with Borrowing Constraints

Roberto Perotti, Tommaso Monacelli and Florin Bilbiie

No 9088, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically, are contractionary; the present-value multiplier on consumption is, however, zero. With sticky prices, Ricardian equivalence always fails. A Robin-Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform cut in taxes financed with public debt has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.

Keywords: Borrowing constraint; Public debt; Redistribution; Tax cuts (search for similar items in EconPapers)
JEL-codes: E44 E62 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Public Debt and Redistribution with Borrowing Constraints (2013)
Working Paper: Public Debt and Redistribution with Borrowing Constraints (2013)
Working Paper: Public Debt and Redistribution with Borrowing Constraints (2013)
Working Paper: Public Debt and Redistribution with Borrowing Constraints (2013)
Working Paper: Public Debt and Redistribution with Borrowing Constraints (2012)
Working Paper: Public Debt and Redistribution with Borrowing Constraints (2012)
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