Reputation in a model with a limited debt structure

Debt and Deficit Fluctuations in a Time-Consistent Setup

“…The optimality conditions (6) and (7) can be used to substitute away taxes and prices from the household budget constraint to obtain the implementability constraint to be taken into account by the government:…”

“…1 Thus, the particular management of the maturity of public debt to make the full-commitment policy time-consistent, as proposed by Lucas and Stokey (1983) and Domínguez (2005), or to complete the market, as proposed by Angeletos (2002), cannot be applied.…”

“…They show that equilibrium with differentiable policy function exists for the particular utility function. 6 Here and in the appendix we skip the arguments of the functions to simplify the notation. 7 To see this, note that without distortionary taxation, the first-order conditions corresponding to the control variables become u c = u g = u x .…”

“…, b t = 0, and equation (6) implies that, over time, τ t is constant and the primary deficit is zero.…”

“…Moreover, the response of consumption is greater than the response of leisure in absolute value, which combined with (6) implies that the response of taxes to a positive productivity shock is decreasing in v g (and changing sign from positive to negative at v g = 1). The public debt in period t, b t = c t /φ c ∞ j=t…”