Sustainable plans and debt

No 125, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper presents a simple general equilibrium model of optimal taxation similar to that of Lucas and Stokey (1983), except that we let the government default on its debt. As a benchmark, we consider Ramsey equilibria in which the government can precommit its policies at the beginning of time. We then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational. We concentrate on trigger mechanisms which specify reversion to the finite horizon equilibrium after deviations by the government. The main result is that no Ramsey equilibrium with positive debt can be supported by such trigger mechanisms.

Keywords: Economic policy; Debt (search for similar items in EconPapers)
Date: 1989
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Citations: View citations in EconPapers (7)

Published in Journal of Economic Theory (Vol. 61, n.2, December 1993, pp. 230-261)

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