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Ghiglino, Christian
Shell, Karl
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Working paper 3-98
In overlapping-generations economies with perfect financial markets and lumpsum taxation, restrictions on the government budget deficits do not limit the set of achievable allocations. For economies in which tax instruments are distortionary and limited in number, deficits are irrelevant only in the unrealistic case in which the number of tax instruments is large relative to the number of policy goals. In particular, if the government can use only anonymous consumption taxes, then achieving the prescribed deficits without changing the equilibrium allocation will typically be impossible when the number of consumers exceeds the number of commodities. A similar result holds if consumer credit is (exogenously) restricted. Surprisingly, in this case, distortionary taxes may be more likely than lump-sum taxes to lead to the irrelevance of government deficits.
Balanced Budget
Balanced-Budget Amendment
Burden of the Public Debt
Comparative Statics
Consumption Taxes
Credit Restrictions
Distortionary Taxes
Economic Policy
Government Budget Deficit
Maastricht Treaty
Optimal Taxation
Overlapping Generations
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Working Paper

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