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Optimal time-consistent taxation with default

Author

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  • Karen Kopecky

    (Federal Reserve Bank of Atlanta)

  • Anastasios Karantounias

    (Federal Reserve Bank of Atlanta)

Abstract

We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues non-contingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs. Our setup blends elements of time-consistent fiscal policy and the sovereign default literature.

Suggested Citation

  • Karen Kopecky & Anastasios Karantounias, 2015. "Optimal time-consistent taxation with default," 2015 Meeting Papers 1297, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1297
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    References listed on IDEAS

    as
    1. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
    2. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June.
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    Cited by:

    1. Guo, Si & Pei, Yun & Xie, Zoe, 2022. "A dynamic model of fiscal decentralization and public debt accumulation," Journal of Public Economics, Elsevier, vol. 212(C).
    2. Paczos, Wojtek & Shakhnov, Kirill, 2022. "Defaulting on Covid debt," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    3. de Beauffort, Charles, 2023. "When is government debt accumulation optimal in a liquidity trap?," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    4. Anastasios Karantounias, 2019. "A dynamic theory of the excess burden of taxation," 2019 Meeting Papers 1356, Society for Economic Dynamics.
    5. Si Guo & Yun Pei & Zoe Xie, 2018. "Fiscal Decentralization, Intergovernmental Transfer, and Overborrowing," 2018 Meeting Papers 975, Society for Economic Dynamics.
    6. Si Guo & Yun Pei & Zoe Xie, 2018. "Decentralization and Overborrowing in a Fiscal Federation," FRB Atlanta Working Paper 2018-9, Federal Reserve Bank of Atlanta.
    7. Tamon Asonuma & Hyungseok Joo, 2021. "Public Capital and Fiscal Constraint in Sovereign Debt Crises," School of Economics Discussion Papers 0621, School of Economics, University of Surrey.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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