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A Ramsey Theory of Financial Distortions

By: Contributor(s): Material type: Continuing resourceContinuing resourcePublication details: Journal of Political Economy; 2024Description: 2612-2654ISSN:
  • 0022-3808
Subject(s): Online resources: Summary: The return on government debt is lower than that of assets with similar payoffs. We study optimal debt management and taxation when the government cannot directly redistribute toward the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. Optimal government debt provision calls for gradually closing the wedge between the returns as much as possible, but tax policy may work as a countervailing force: as long as financial frictions bind, it can be optimal to tax capital even if this magnifies the discrepancy in returns.
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Article Index Article Index Dr VKRV Rao Library Vol. 132, No. 8 Not for loan AI740

The return on government debt is lower than that of assets with similar payoffs. We study optimal debt management and taxation when the government cannot directly redistribute toward the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. Optimal government debt provision calls for gradually closing the wedge between the returns as much as possible, but tax policy may work as a countervailing force: as long as financial frictions bind, it can be optimal to tax capital even if this magnifies the discrepancy in returns.

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