Fiscal policy and debt management with incomplete markets

Anmol Bhandari, David Evans, Mikhail Golosov, Thomas J. Sargent

    Research output: Contribution to journalArticle

    Abstract

    A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets.We develop a method that uses second order approximations of Ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion. The asymptotic mean of the planner's portfolio minimizes a measure of fiscal risk. We obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit, aggregate consumption, and returns on traded securities. For U.S. data, we find that the optimal target debt level is negative but close to zero, the invariant distribution of debt is very dispersed, andmean reversion is slow.

    Original languageEnglish (US)
    Pages (from-to)617-663
    Number of pages47
    JournalQuarterly Journal of Economics
    Volume132
    Issue number2
    DOIs
    StatePublished - 2017

    ASJC Scopus subject areas

    • Economics and Econometrics

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  • Cite this

    Bhandari, A., Evans, D., Golosov, M., & Sargent, T. J. (2017). Fiscal policy and debt management with incomplete markets. Quarterly Journal of Economics, 132(2), 617-663. https://doi.org/10.1093/qje/qjw041