IDEAS home Printed from https://ideas.repec.org/a/aea/aejmac/v14y2022i3p1-41.html
   My bibliography  Save this article

Optimal Taxation with Endogenous Default under Incomplete Markets

Author

Listed:
  • Demian Pouzo
  • Ignacio Presno

Abstract

How are the optimal tax and debt policies affected if the government can default on its debt? We address this question from a normative perspective in an economy with noncontingent government debt, domestic default, and labor taxes. On one hand, default prevents the government from incurring future tax distortions associated with servicing the debt. On the other hand, default risk gives rise to endogenous credit limits that hinder the government's ability to smooth taxes. We characterize the fiscal policy and show how the option to default alters the near–unit root component of taxes in the economy with risk-free borrowing.

Suggested Citation

  • Demian Pouzo & Ignacio Presno, 2022. "Optimal Taxation with Endogenous Default under Incomplete Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 1-41, July.
    • Handle: RePEc:aea:aejmac:v:14:y:2022:i:3:p:1-41
    DOI: 10.1257/mac.20160101
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/mac.20160101
    Download Restriction: no
    File URL: https://doi.org/10.3886/E134062V1
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/mac.20160101.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/mac.20160101.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://libkey.io/10.1257/mac.20160101?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tamon Asonuma & Hyungseok Joo, 2023. "Sovereign Defaults and Debt Restructurings: Public Capital and Fiscal Constraint Tightness," School of Economics Discussion Papers 0323, School of Economics, University of Surrey.
    2. Tran-Xuan, Monica, 2023. "Optimal redistributive policy in debt constrained economies," Journal of International Economics, Elsevier, vol. 144(C).
    3. Tamon Asonuma & Hyungseok Joo, 2023. "Sovereign Defaults and Public Investment (Capital)," School of Economics Discussion Papers 1123, School of Economics, University of Surrey.

    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejmac:v:14:y:2022:i:3:p:1-41. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.