TY - JOUR
T1 - The macroeconomic effects of government debt in a stochastic growth model
AU - Ludvigson, Sydney
N1 - Funding Information:
1 am grateful to John Y. Campbell for many valuable discussions, to Martin Lettau, Robin Lumsdaine, Matt Mercurio, Harold Uhlig, and seminar participants in the Princeton Macro/Finance seminar (October 17, 1994) for helpful comments and suggestions, to an anonymous referee for helpful suggestions on how to restructure the paper, and to the Alfred P. Sloan Foundation for financial support.
PY - 1996/8
Y1 - 1996/8
N2 - This paper studies how government liabilities affect macroeconomic aggregates in a standard general equilibrium growth model. There are two principal results: (i) Though it is often thought that fiscal deficits crowd out investment, this paper shows that deficit-financed cuts in distortionary income taxation may stimulate investment even if agents expect future taxes on capital income to be higher. This result is dependent on the values of two key parameters: the elasticity of labor supply and the degree of persistence in the government debt process, (ii) The economy's response to an increase in government expenditure depends on how it is financed. Distortionary tax finance may lead to a decline in output, consumption, and investment. In contrast, deficit finance may increase output and consumption.
AB - This paper studies how government liabilities affect macroeconomic aggregates in a standard general equilibrium growth model. There are two principal results: (i) Though it is often thought that fiscal deficits crowd out investment, this paper shows that deficit-financed cuts in distortionary income taxation may stimulate investment even if agents expect future taxes on capital income to be higher. This result is dependent on the values of two key parameters: the elasticity of labor supply and the degree of persistence in the government debt process, (ii) The economy's response to an increase in government expenditure depends on how it is financed. Distortionary tax finance may lead to a decline in output, consumption, and investment. In contrast, deficit finance may increase output and consumption.
KW - Distortionary tax
KW - Fiscal policy
KW - Government debt
KW - Ricardian equivalence
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U2 - 10.1016/0304-3932(96)01271-8
DO - 10.1016/0304-3932(96)01271-8
M3 - Article
AN - SCOPUS:0030210498
VL - 38
SP - 25
EP - 45
JO - Carnegie-Rochester Confer. Series on Public Policy
JF - Carnegie-Rochester Confer. Series on Public Policy
SN - 0304-3932
IS - 1
ER -