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A p Theory of Taxes and Debt Management

Author

Listed:
  • Wei Jiang
  • Thomas J. Sargent
  • Neng Wang
  • Jinqiang Yang

Abstract

Distortions induce a benevolent government that must finance an exogenous expenditure process to smooth taxes. An optimal fiscal plan determines the marginal cost —p’ of servicing government debt and makes government debt risk-free. A convenience yield tilts debts forward and taxes backward. An option to default determines debt capacity. Debt-GDP ratio dynamics are driven by 1) a primary deficit, 2) interest payments, 3) GDP growth, and 4) hedging costs. We provide quantitative comparative dynamic statements about debt capacity, debt-GDP ratio transition dynamics, and time to exhaust debt capacity.

Suggested Citation

  • Wei Jiang & Thomas J. Sargent & Neng Wang & Jinqiang Yang, 2022. "A p Theory of Taxes and Debt Management," NBER Working Papers 29931, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29931
    Note: AP EFG IFM ME PE
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    Cited by:

    1. Vasiliki Dimakopoulou & George Economides & Apostolis Philippopoulos & Vanghelis Vassilatos, 2023. "Can central banks do the unpleasant job that governments should do?," Working Papers 324, Bank of Greece.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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