European Parliament Library

Politically Optimal Fiscal Policy, Irina Yakadina, Michael Kumhof

Why do governments issue large amounts of debt? In what sense and for whom is such a policy optimal? We show that twisting the optimal taxation paradigm produces very reasonable predictions for debt and real interest rates. Adding an extra dimension of uncertainty about the political planning horizon gives rise to a positive and very plausible government debt-to-GDP ratio of about 55 percent in a model that otherwise predicts negative government debt. We quantify the impact of political uncertainty on steady state and business cycle dynamics. We illustrate how populist tax cuts can cause business cycle fluctuations
Table Of Contents
Contents; I. Introduction; II. TheModel; A. Decentralized Economy; 1. Households; 2. Firms; 3. Financial Intermediary; 4. Government; 5. Competitive Equilibrium; B. The Political Planner; III. Political Equilibrium- The Results; A. Calibration; B. The Non-Stochastic Steady State; C. The Stochastic Steady State; D. Transition to the Stochastic Steady State; Tables; 1. Long Run Characteristics of the Model; Figures; 1. Transition to the Stochastic Steady State for a Given History of Shocks; E. Optimal Policy froma Timeless Perspective; 1. Precautionary Government Saving
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (28 p.)
Specific Material Designation
Form Of Item

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