Department of Economics and Business - Universitat Pompeu Fabra

Title:: Optimal fiscal policy without commitment: Revisiting Lucas-Stokey
Authors:: Davide Debortoli, Ricardo Nunes and Pierre Yared
Date:: February 2019 (Revised: September 2020)
Abstract:: According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not necessarily tax above the peak of the Laer curve, even if it is ex-ante optimal to do so.
Keywords:: Public debt, optimal taxation, fiscal policy
JEL codes:: H63, H21, E62
Area of Research:: Macroeconomics and International Economics
Comment:: Attachments:
Online Appendix

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