Unique Implementation of Permanent Primary Deficits?

Amol Amol and Erzo G. J. Luttmer

No 807, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: In an economy with incomplete markets and consumers who are sufficiently risk averse, we show that the government can uniquely implement a permanent primary deficit using nominal debt and continuous Markov strategies for primary deficits and payments to debtholders. But this result fails if there are also useless pieces of paper (bitcoin for short) that can be traded. If there is trade in bitcoin, then there is no continuous Markov strategy for the government that leads to unique implementation. Instead, there is a continuum of equilibria with distinct real allocations in which the price of bitcoin converges to zero. And there is a balanced budget trap: continuous government policies designed for a permanent primary deficit cannot eliminate an alternative steady state in which r - g = 0 and the government is forced to balance its budget. A legal prohibition against bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on bitcoin at the rate -(r - g) > 0.

Keywords: Fiscal policy; Primary deficits; Fiscal theory of the price level; Price level determinacy (search for similar items in EconPapers)
JEL-codes: E31 E60 H60 (search for similar items in EconPapers)
Date: 2024-10-17
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:98987

DOI: 10.21034/wp.807

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