Government Debt Limits and Stabilization Policy

Daniel Murphy () and Eric Young

No 20-23, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We evaluate alternative public debt management policies in light of constraints imposed by the effective lower bound on interest rates. Replacing the current limit on gross debt issued by the fiscal authority with a limit on consolidated debt of the government can ensure that output always reaches its potential, but it may permit excess government spending when the economy is away from the effective lower bound. The welfare-maximizing policy sets the gross debt limit to the level implied by Samuelson (1954), while the central bank finances government spending with money when the economy is at the effective lower bound.

Keywords: Government debt limits; zero lower bound; stabilization policy; inefficiency (search for similar items in EconPapers)
JEL-codes: E52 E58 E63 (search for similar items in EconPapers)
Pages: 27
Date: 2020-07-31
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:88466

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DOI: 10.26509/frbc-wp-202023

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