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 language | English (US) |
|---|---|
| Pages (from-to) | 617-663 |
| Number of pages | 47 |
| Journal | Quarterly Journal of Economics |
| Volume | 132 |
| Issue number | 2 |
| DOIs | |
| State | Published - 2017 |
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ASJC Scopus subject areas
- Economics and Econometrics
Cite this
Fiscal policy and debt management with incomplete markets. / Bhandari, Anmol; Evans, David; Golosov, Mikhail; Sargent, Thomas.
In: Quarterly Journal of Economics, Vol. 132, No. 2, 2017, p. 617-663.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Fiscal policy and debt management with incomplete markets
AU - Bhandari, Anmol
AU - Evans, David
AU - Golosov, Mikhail
AU - Sargent, Thomas
PY - 2017
Y1 - 2017
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85021709576&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85021709576&partnerID=8YFLogxK
U2 - 10.1093/qje/qjw041
DO - 10.1093/qje/qjw041
M3 - Article
VL - 132
SP - 617
EP - 663
JO - Quarterly Journal of Economics
JF - Quarterly Journal of Economics
SN - 0033-5533
IS - 2
ER -