Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey

Debortoli, Davide; Nunes, Ricardo; Yared, Pierre

doi:10.1086/713191

Cited by 13 publications

(7 citation statements)

References 24 publications

(24 reference statements)

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“…Lucas and Stokey (1983) argue that there is no distortion due to lack of commitment, since the government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. 5 However, Debortoli et al (2021) show that this result does not generally hold in the same model as Lucas and Stokey (1983). As such, our analysis of optimal fiscal policy considers the entire set of MPCE's, not only the ones which coincide with the commitment policy (should they exist).…”

Section: Related Literaturementioning

confidence: 92%

The Commitment Benefit of Consols in Government Debt Management

Debortoli

Nunes

Yared

2022

American Economic Review: Insights

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We consider optimal government debt maturity in a deterministic economy in which the government can issue any arbitrary debt maturity structure and in which bond prices are a function of the government’s current and future primary surpluses. The government sequentially chooses policy, taking into account how current choices—which impact future policy—feed back into current bond prices. We show that issuing consols constitutes the unique stationary optimal debt portfolio, as it boosts government credibility to future policy and reduces the debt financing costs. (JEL E62, G12, H61, H63)

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Section: Related Literaturementioning

confidence: 92%

The Commitment Benefit of Consols in Government Debt Management

Debortoli

Nunes

Yared

2022

American Economic Review: Insights

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“…For a review of optimal fiscal policy setups in general, the reader is referred to the studies by Werning (2007), and Schmitt-Grohe and Uribe (2007), as well as to the references therein. Lastly, a very recent study by Debortoli et al. (2021) covers the case without commitment, which is outside the scope of the current paper.…”

Section: Notesmentioning

confidence: 99%

Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

Vasilev

2022

IJSE

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PurposeThis paper aims to explore the effects of fiscal policy in an economy with efficiency wages, consumption taxes and a common income tax rate.Design/methodology/approachA dynamic general-equilibrium model with the government sector is calibrated to Bulgarian data (1999–2018). Two regimes are compared and contrasted – the exogenous (observed) vs optimal policy (Ramsey) case.FindingsThe main findings are as follows: (1) The optimal steady-state income tax rate is zero. (2) The benevolent Ramsey planner provides three times lower amount of the utility-enhancing public services. (3) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.7%.Originality/valueThe focus of the paper is on the relative importance of consumption vs income taxation, as well as on the provision of utility-enhancing public services. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-08-2021-0488.

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“…This discourages governments from issuing these instruments . 5 Lack of commitment to fiscal policy can induce governments facing an adverse budget shock to manipulate tax rates to alter intertemporal consumption levels in favor of reducing the market value of debt (Debortoli et al, 2017(Debortoli et al, , 2021. This creates an additional drawback when applying the theoretical recommendations of Angeletos ( 2002) and Buera and Nicolini (2004).…”

Section: N O T E Smentioning

confidence: 99%

“…In addition, real securities with longer maturities are recommended under a set of assumptions in the models of Angeletos (2002) and Buera and Nicolini (2004). Nevertheless, these recommendations are refuted in later studies, which argue in favor of shortening debt maturity when the costs associated with longer maturities outweigh the benefits of insurance (Debortoli et al., 2017, 2021).…”

Section: Public Debt Composition: An Optimal Taxation Perspectivementioning

confidence: 99%

Optimal public debt composition during debt crises: A review of theoretical literature

El-Berry

Naert

Goeminne

2022

Journal of Economic Surveys

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This study surveys the theoretical literature on the optimal public debt composition during sovereign debt crises. This survey is particularly relevant because sovereign debt crises have been recurrent manifestations over the past few decades, and there is growing evidence on the critical role of the composition of public debt portfolios during such events. Public debt composition refers to the characteristics of public debt portfolios, such as debt maturity, currency composition, and types of creditors. This survey adopts a broad definition of sovereign debt crisis, encompassing a post-default phase when the crisis-ridden country enters debt renegotiations and restructuring, and a pre-default phase in which debtor countries either take a large non-concessional loan from the International Monetary Fund (IMF) to avoid debt default and restructuring or experience critically high bond spreads and default risk. This survey collects the dispersed literature on the theoretically optimal public debt composition choices from a sovereign borrower's perspective during both phases of the sovereign debt crisis. The surveyed theoretical literature reveals several trade-offs underlying the sovereign's public debt composition choices during debt crises.

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Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey

Cited by 13 publications

References 24 publications

The Commitment Benefit of Consols in Government Debt Management

The Commitment Benefit of Consols in Government Debt Management

Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

Optimal public debt composition during debt crises: A review of theoretical literature

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