Government Saving with Limited Commitment

Iván Werning and Dan Cao ()

No 110, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper builds a continuous time model of government saving behavior. The model features rulers that rotate out of power. The ruler makes two decisions: a. total spending expenditure; and b. the composition of spending between two goods, one with public benefits and another with private benefits for the ruling government ("pork spending"). We assume that preferences are such that pork spending rises with total spending but that the fraction spent on pork falls with rising total spending. In equilibrium, for intermediate values of the interest rate, government debt dynamics are affected by initial conditions: above a certain level of debt there is overspending so that debt remains high in a "poverty trap"; below this threshold, debt falls and the government eventually accumulates assets.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:110

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