Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure

2002/08/01 by G.-M. Angeletos, George Marios Angeletos · 1 citation
Economics, Econometrics and Finance · #Fiscal Policies and Political Economy #Monetary Policy and Economic Impact #Fiscal Policy and Economic Growth

paper · doi:10.1162/003355302760193977

Abstract

How should the tax rate and the level of public debt adjust to an adverse fiscal shock? What is the optimal maturity structure of public debt? If the maturity structure is carefully chosen, the ex post variation in the market value of public debt can cover the government against the need to raise taxes or debt if fiscal conditions should turn bad. In general, almost every Arrow-Debreu allocation can be implemented with noncontingent debt of different maturities. In a stylized example, the optimal policy is implemented by selling a perpetuity and investing in a short-term asset.

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