Fiscal policy and debt management with incomplete markets

Anmol Bhandari, David Evans, Mikhail Golosov, Thomas J. Sargent

Research output: Contribution to journalArticlepeer-review

11 Scopus citations


A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets.We develop a method that uses second order approximations of Ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion. The asymptotic mean of the planner's portfolio minimizes a measure of fiscal risk. We obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit, aggregate consumption, and returns on traded securities. For U.S. data, we find that the optimal target debt level is negative but close to zero, the invariant distribution of debt is very dispersed, andmean reversion is slow.

Original languageEnglish (US)
Pages (from-to)617-663
Number of pages47
JournalQuarterly Journal of Economics
Issue number2
StatePublished - May 1 2017

Bibliographical note

Publisher Copyright:
© The Author(s) 2016. Published by Oxford University Press, on behalf of the President and Fellows of Harvard College.


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