The Economic Effects of Restrictions on Government Budget Deficits

Christian Ghiglino, Karl Shell

Research output: Working paperResearch

47 Downloads (Pure)

Abstract

In overlapping-generations economies with perfect financial markets and lump-sum taxation, restrictions on the government budget deficits do not limit the set of achievable allocations. For economies in which tax instruments are distortionary and limited in number, deficits are irrelevant only in the unrealistic case in which the number of tax instruments is large relative to the number of policy goals. In particular, if the government can use only anonymous consumption taxes, then achieving the prescribed deficits without changing the equilibrium allocation will typically be impossible when the number of consumers exceeds the number of commodities. A similar result holds if consumer credit is (exogenously) restricted. Surprisingly, in this case, distortionary taxes may be more likely than lump-sum taxes to lead to the irrelevance of government deficits.
Original languageEnglish
Place of PublicationCopenhagen
PublisherDepartment of Economics. Copenhagen Business School
Number of pages32
Publication statusPublished - 1998
SeriesWorking Paper / Department of Economics. Copenhagen Business School
Number3-98

Keywords

  • Balanced budget
  • Balanced-budget amendmen
  • Burden of the public debt
  • Comparative statics
  • Consumption taxes
  • Credit restrictions
  • Distortionary taxes
  • Economic policy
  • Government budget deficit
  • Maastricht Treaty
  • Optimal taxation
  • Overlapping generations

Cite this