Public Debt and Redistribution with Borrowing Constraints

Journal article: We build a model with financial imperfections and heterogeneous agents and analyse the effects of two types of fiscal policy: revenue-neutral, intratemporal redistribution; and debt-financed tax cuts, which we interpret as intertemporal redistribution. Under flexible prices, the two policies are either neutral or display effects that are at odds with the empirical evidence. With sticky prices, Ricardian equivalence always fails. A Robin Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform, debt-financed tax cut has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.

Author(s)

Florin Bilbiie, Tommaso Monacelli, Roberto Perotti

Journal
  • The Economic Journal
Date of publication
  • 2013
Keywords JEL
E62 H23 H63
Keywords
  • Debt
  • Fiscal Policy
  • Policy
  • Redistribution
  • Revenue
  • Ricardian Equivalence
  • Tax
Pages
  • 64-98
Version
  • 1
Volume
  • 123