Political disagreement, lack of commitment and the level of debt

Davide Debortoli and Ricardo Nunes

No 938, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We analyze how public debt evolves when successive policymakers have different policy goals and cannot make credible commitments about their future policies. We consider several cases to be able to disentangle and quantify the respective effects of imperfect commitment and political disagreement. Absent political turnover, imperfect commitment drives the long-run level of debt to zero. With political disagreement, debt is a sizeable fraction of GDP and increasing in the degree of polarization among parties, no matter the degree of commitment. The frequency of political turnover does not produce quantitatively relevant effects. These results are consistent with much of the existing empirical evidence. Finally, we find that in the presence of political disagreement the welfare gains of building commitment are lower.

Keywords: Debts, Public; Fiscal policy (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cdm, nep-pbe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Political Disagreement, Lack of Commitment and the Level of Debt (2011)
Working Paper: Political Disagreement, Lack of Commitment and the Level of Debt (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:938

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