Fiscal Policy and Debt Management with Incomplete Markets

Citation data:

The Quarterly Journal of Economics, ISSN: 0033-5533, Vol: 132, Issue: 2, Page: 617-663

Publication Year:
2017
Captures 20
Readers 20
Citations 1
Citation Indexes 1
DOI:
10.1093/qje/qjw041
Author(s):
Bhandari, Anmol; Evans, David; Golosov, Mikhail; Sargent, Thomas J.
Publisher(s):
Oxford University Press (OUP)
Tags:
Economics, Econometrics and Finance
article description
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.