Year: 2010
Type: article
Abstract: We study the consequences of nonneutrality of government debt for macroeconomic stabilization policy in a sticky‐price model. Ricardian equivalence fails because debt has a negative impact on its rate of return and on private savings, which is induced by assuming transaction services of bonds. Under aggressive monetary policy regimes, macroeconomic fluctuations tend to be stabilized if nominal budget deficits are low. A smooth debt path limits inflation expectations, such that inflation variances can be reduced. Under a balanced budget policy, the central bank's output gap–inflation volatility trade‐off is improved relative to an environment where debt is neutral.
Source: International Economic Review
Authors: Ludger Linnemann, Andreas Schabert
Institution: TU Dortmund University
Language: English
Domain: Social Sciences
Open Access status: green
Funder: European Commission
OpenAlex ID: W2117076873