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Fiscal policy, debt constraint and expectations-driven volatility

Kazuo Nishimura (), Thomas Seegmuller and Alain Venditti ()
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Thomas Seegmuller: GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales

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Abstract: Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectations-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.

Keywords: Endogenous cycles; Endogenous cycles; Income taxation; indeterminacy; public debt (search for similar items in EconPapers)
Date: 2015-12
Note: View the original document on HAL open archive server: https://hal-amu.archives-ouvertes.fr/hal-01456115
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Published in Journal of Mathematical Economics, Elsevier, 2015, 61 (C), pp.305--316. 〈10.1016/j.jmateco.2015.09.003〉

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Journal Article: Fiscal policy, debt constraint and expectations-driven volatility (2015) Downloads
Working Paper: Fiscal Policy, Debt Constraint and Expectation-Driven Volatility (2014) Downloads
Working Paper: Fiscal Policy, Debt Constraint and Expectation-Driven Volatility (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01456115

DOI: 10.1016/j.jmateco.2015.09.003

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