Journal of Political Economy Vol. 129 No. 5 2021

Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey

Davide Debortoli^1,2,3,4; Ricardo Nunes^5,3; Pierre Yared⁶

¹ Universitat Pompeu Fabra · ² Centre de Recerca en Economia Internacional · ³ Centre for Economic Policy Research · ⁴ Barcelona School of Economics · ⁵ University of Surrey · ⁶ National Bureau of Economic Research

Abstract

According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not necessarily tax above the peak of the Laffer curve, even if it is ex ante optimal to do so.

DOI

10.1086/713191

Volume

129

Issue

5

Pages

1640-1665

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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