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Deep habits and the macroeconomic effects of government debt

Rym Aloui ()

No 2010,22, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a micro-founded framework which 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 of public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of debt-financed tax cuts. We show that the interest rate rises, entailing higher markups, which imply a fall in employment and consumption. It is particularily noteworthy that, even without capital, a crowding out effect of government debt is obtained in the long run. However, the short-run expansionary effect of debt-financed tax cuts, which would eventually be expected in a non-Ricardian framework, fails to occur. This is due to our flexible-price framework. On the other hand, we show that incorporating sticky prices in our model causes debt-financed tax cuts to have a short-run expansionary effect while preserving the long-run contractionary effect.

Keywords: Wealth Effects; Fiscal Policy; Public Debt Shock; Deep Habits; Overlapping Generations; Monopolistic Competition (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Journal Article: DEEP HABITS AND THE MACROECONOMIC EFFECTS OF GOVERNMENT DEBT (2013) Downloads
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