Thomas Sargent: Implementing Optimal Fiscal Policy with Short Term Debt

Speaker: Thomas J. Sargent (New York University)

Abstract: 

Debortoli, Nunes, and Yared (2021) showed that Lucas and Stokey’s (1983) debt management policy for implementing a Ramsey plan fails when initial government debt is too high. We propose a modified timing protocol that prevents continuation Ramsey planners from resetting current-period tax rates. Combined with a “short route” debt management strategy that leaves longer-term debts unchanged while using short-term debt to finance accumulated liabilities, we implement all Ramsey plans, even those with the high debt levels that trouble Lucas and Stokey’s implementation.
We present various examples, including ones with different debt structures and cyclical government spending patterns, that indicate the wide applicability of our results and how our implementation equalizes Lagrange multipliers of the Ramsey planner and continuation planners, a key signature of a successful implementation.

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