Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86351
Authors: 
Linnemann, Ludger
Schabert, Andreas
Year of Publication: 
2005
Series/Report no.: 
Tinbergen Institute Discussion Paper 05-077/2
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.
Subjects: 
Government debt
fiscal and monetary policy rules
stabilization policy
equilibrium uniqueness
JEL: 
E32
E63
E52
Document Type: 
Working Paper

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