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 55percent 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.
|Keywords:||fiskalna politika, politična ekonomija, optimizacija, davčni sistemi, davki, cikli, dolgovi, fiscal policy, political economy, optimization, tax systems, taxes, business cycles, debts|
|Work type:||Not categorized (r6)|
|Organization:||EF - Faculty of Economics|
|Publisher:||International Monetary Fund|
|Number of pages:||26 str.|
|Average score:||(0 votes)|
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