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 Laffer curve, even if it is ex-ante optimal to do so.

Authors
Davide Debortoli, Ricardo Nunes, and Pierre Yared
Format
Journal Article
Publication Date
Journal
Journal of Political Economy

Full Citation

Debortoli, Davide, Ricardo Nunes, and Pierre Yared
. “Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey.”
Journal of Political Economy
vol.
129
, (March 24, 2021):
1640
-
1665
.