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Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank >
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http://hdl.handle.net/10419/42209
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| Title: | | Deep habits and the macroeconomic effects of government debt  |
| Authors: | | Aloui, Rym |
| Issue Date: | | 2010 |
| Series/Report no.: | | Discussion Paper Series 1: Economic Studies 2010,22 |
| Abstract: | | In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a micro-founded framework which combines time-varying markups, endogenous labor supply and overlapping generations based on infinitely-lived families. The main contribution of this paper is to provide a new transmission mechanism of public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of debt-financed tax cuts. We show that the interest rate rises, entailing higher markups, which imply a fall in employment and consumption. It is particularily noteworthy that, even without capital, a crowding out effect of government debt is obtained in the long run. However, the short-run expansionary effect of debt-financed tax cuts, which would eventually be expected in a non-Ricardian framework, fails to occur. This is due to our flexible-price framework. On the other hand, we show that incorporating sticky prices in our model causes debt-financed tax cuts to have a short-run expansionary effect while preserving the long-run contractionary effect. |
| Subjects: | | Wealth Effects Fiscal Policy Public Debt Shock Deep Habits Overlapping Generations Monopolistic Competition |
| JEL: | | E63 E52 |
| ISBN: | | 978-3-86558-655-1 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank
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