Debt stabilization in a non-Ricardian economy

Working paper

In models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk. This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker's rate of time preference such that it may be optimal to reduce debt today to reduce distortionary taxation in the future. Moreover, the level of the capital stock (and therefore output and consumption) in t...

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Authors: Wren-Lewis, S; Leith, C; Moldovan, I

• Publication status: Published
• Publisher: University of Oxford Publisher's website
• Series: Department of Economics Discussion Paper Series
• Publication date: 2011-03-01
• Paper number: 542
• Keywords: distortionary taxes; macroeconomic stability; non-Ricardian consumers