DEEP HABITS AND THE MACROECONOMIC EFFECTS OF GOVERNMENT DEBT

Rym Aloui ()
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Rym Aloui: GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - Université de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a microfounded framework that combines time-varying markups, endogenous labor supply, and overlapping generations based on infinitely lived families. The main contribution of this paper is to provide a new transmission mechanism for public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of a positive shock to public debt. We show that the interest rate rises, entailing higher markups and a fall in employment and consumption. Interestingly, even without capital, a crowding-out effect of government debt is obtained in the long run. In addition, we show that when prices are sticky, public debt has a short-run expansionary effect, which is strengthened by the presence of deep habits.

Date: 2013-12
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Published in Macroeconomic Dynamics, 2013, 17 (8), pp.1659-1686. ⟨10.1017/S1365100512000259⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03230857

DOI: 10.1017/S1365100512000259

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