Public debt in economies with heterogeneous agents

Bhandari, Anmol; Evans, David; Golosov, Mikhail; Sargent, Thomas J.

doi:10.1016/j.jmoneco.2017.09.007

Cited by 32 publications

(27 citation statements)

References 30 publications

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“…4 See Heathcote (2005) and Bhandari, Evans, Golosov, and Sargent (2017), among many others. 5 A few remarkable exceptions are Bilbiie and Straub (2004), Monacelli and Perotti (2011), Hagedorn, Manovskii, andMitman (2017), andBrinca, Holter, Krusell, andMalafry (2016).…”

mentioning

confidence: 99%

The Heterogeneous Effects of Government Spending: It’s All About Taxes

Ferrière¹,

Navarro

2018

internationalfinance

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This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model's cross-sectional implications.

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mentioning

confidence: 99%

The Heterogeneous Effects of Government Spending: It’s All About Taxes

Ferrière¹,

Navarro

2018

internationalfinance

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“…If it does, default is optimal. D'Erasmo and Mendoza [21] extend this analysis to a two-period model with shocks 13 Note in particular that…”

Section: Distributional Default Incentivesmentioning

confidence: 86%

“…In the quantitative exercise, we first calibrate these weights to match the mean spreads observed in the data, and then consider variations of the ω(b, y) function, including a case in which we replace it with the average distribution of bonds and income in the economy. Bhandari et al [13] and Chang et al [16] follow similar approaches of calibrating welfare weights to match data targets and using also weights given by the long-run average of the model's wealth distribution. B t+1 and τ t are determined after the default decision.…”

Section: Governmentmentioning

confidence: 99%

History Remembered: Optimal Sovereign Default on Domestic and External Debt

D’Erasmo,

Mendoza

2019

Working Paper (Federal Reserve Bank of Philadelphia)

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Infrequent but turbulent overt sovereign defaults on domestic creditors are a "forgotten history" in macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives versus the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency) and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply.

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“…D'Erasmo and Mendoza [21] extend this analysis to a two-period model with shocks 13 Note in particular that…”

Section: Distributional Default Incentivesmentioning

confidence: 86%

History Remembered: Optimal Sovereign Default on Domestic and External Debt

D’Erasmo

Mendoza

2018

SSRN Journal

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Infrequent but turbulent overt sovereign defaults on domestic creditors are a "forgotten history" in Macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives v. the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency), and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply.

show abstract

Public debt in economies with heterogeneous agents

Cited by 32 publications

References 30 publications

The Heterogeneous Effects of Government Spending: It’s All About Taxes

The Heterogeneous Effects of Government Spending: It’s All About Taxes

History Remembered: Optimal Sovereign Default on Domestic and External Debt

History Remembered: Optimal Sovereign Default on Domestic and External Debt

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