Debt Non-Neutrality, Policy Interactions, and Macroeconomic Stability

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 05-077/2

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy ; Monetary Policy
• Subject: Government debt ; fiscal and monetary policy rules ; stabilization policy ; equilibrium uniqueness ; Öffentliche Schulden ; Finanzpolitik ; Geldpolitik ; Regelbindung ; Konjunkturpolitik ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Linnemann, Ludger ; Schabert, Andreas
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/86351
• Last update: 10.03.2025, 11:41 AM CET