Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2005-08-03
Number: 05-077/2
Author-Name: Ludger Linnemann
Author-Workplace-Name: University of Cologne
Author-Name: Andreas Schabert
Author-Email: a.schabert@uva.nl
Author-Workplace-Name: Faculty of Economics and Econometrics, University of Amsterdam
Title: Debt Non-Neutrality, Policy Interactions, and Macroeconomic Stability
Abstract: We study the consequences of non-neutrality of government debt for macroeconomic stabilization policy in an environment where prices are sticky. Assuming transaction services of government bonds, Ricardian equivalence fails because public debt has a negative impact on its marginal rate of return and thus on private savings. Stability of equilibrium sequences requires a stationary evolution of real public debt, which steers inflation expectations and rules out endogenous fluctuations. Under anti-inflationary monetary policy regimes, macroeconomic fluctuations tend to decrease with the share of tax financing, which justifies tight debt constraints. In particular, a balanced budget policy stabilizes the economy under cost-push shocks, such that output and inflation variances can be lower than in a corresponding case where debt is neutral.
Classification-JEL: E32; E63; E52
Keywords: Government debt; fiscal and monetary policy rules; stabilization policy; equilibrium uniqueness
File-Url: https://papers.tinbergen.nl/05077.pdf
File-Format: application/pdf
File-Size: 424265 bytes
Handle: RePEc:tin:wpaper:20050077