Markov-perfect optimal fiscal policy: the case of unbalanced budgets

Salvador Ortigueira, Joana Pereira and Paul Pichler ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We study optimal time-consistent fiscal policy in a neoclassical economy with endogenous government spending, physical capital and public debt. We show that a dynamic complementarity between the households’ consumption-savings decision and the government’s policy decision gives rise to a multiplicity of expectations-driven Markov-perfect equilibria. The long-run levels of taxes, government spending and debt are not uniquely pinned down by economic fundamentals, but are determined by expectations over current and future policies. Accordingly, economies with identical fundamentals may significantly differ in their levels of public indebtedness

Keywords: Optimal; fiscal; policy; Markov-perfect; equilibrium; Time-consistent; policy; Expectation; traps (search for similar items in EconPapers)
JEL-codes: E61 E62 H21 H63 (search for similar items in EconPapers)
Date: 2012-10-29
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we1230

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