Fiscal Policy, Debt Constraint and Expectation-Driven Volatility

Kazuo Nishimura (1, 2) , Thomas Seegmuller (3) , Alain Venditti (3, 4)

1 RIEB, Kobe University
2 KIER, Kyoto University
3 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
4 EDHEC Business School

Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectation-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.

Mots clés: income taxation; indeterminacy; endogenous cycles; public debt

Domaines: Economies et finances

Kazuo Nishimura, Thomas Seegmuller, Alain Venditti. Fiscal Policy, Debt Constraint and Expectation-Driven Volatility. 2014. ⟨halshs-01059575⟩