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Debt and government spending in ambiguous times

Author

Listed:
  • Anastasios Karantounias

    (Federal Reserve Bank of Atlanta)

  • Axelle Ferriere

    (New York University)

Abstract

First, we endogenize government expenditures and study their optimal provision and mix with distortionary taxes in an economy without ambiguity. Second, we show that uncertainty over the distribution of shocks generates procyclical or countercyclical allocation of distortions, whereas without ambiguity distortions would be acyclical. Third, we provide a quantitative evaluation of the fiscal plan with ambiguity and analyze its short- and long-run properties. Preliminary results suggest that optimal policy would, (1) delay distortions for the future, or, (2) accelerate distortions and converge to a balanced budget in the long-run, depending on the size of the intertemporal elasticity of substitution.

Suggested Citation

  • Anastasios Karantounias & Axelle Ferriere, 2014. "Debt and government spending in ambiguous times," 2014 Meeting Papers 1129, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1129
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    References listed on IDEAS

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