Sustainable Plans and Mutual Default

Author/Editor:

V. V. Chari ; Patrick E. Kehoe

Publication Date:

March 1, 1990

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper presents a model of optimal taxation in which both private agents and the government can default on their debt. We first consider Ramsey equilibria in which the government can precommit to its policies but in which private agents can default. We then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational. We show that when there is sufficiently little discounting and government consumption fluctuates enough, the Ramsey allocations and policies (in which the government never defaults) can be supported by a sustainable equilibrium.

Series:

Working Paper No. 1990/022

Subject:

Budget planning and preparation Debt default Government consumption Private debt Public debt

English

Publication Date:

March 1, 1990

ISBN/ISSN:

9781451921151/1018-5941

Stock No:

WPIEA0221990

Pages:

38

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