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Debt and Deficit Fluctuations in a Time-Consistent Setup

Grechyna, Daryna (2015): Debt and Deficit Fluctuations in a Time-Consistent Setup. Forthcoming in: Macroeconomic Dynamics

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Abstract

This paper compares the stochastic behavior of fiscal variables under optimal fiscal policy for the cases of full commitment by the government (Ramsey problem) and no commitment by the government (focusing on differentiable Markov perfect equilibrium). It shows that the cyclical properties of fiscal variables are similar for both commitment assumptions. These conclusions are robust to two different specifications of the structure of public bonds (risk-free and state-contingent), and to different sets of the parameters. The cyclical properties of fiscal variables, regardless of commitment assumptions, can be determined by the parameters of the utility function.

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