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Political disagreement, lack of commitment and the level of debt

By Davide Debortoli and Ricardo Nunes

Abstract

We analyze how public debt evolves when successive policymakers have different policy goals and cannot make credible commitments about their future policies. We consider several cases to be able to disentangle and quantify the respective effects of imperfect commitment and political disagreement. Absent political turnover, imperfect commitment drives the long-run level of debt to zero. With political disagreement, debt is a sizeable fraction of GDP and increasing in the degree of polarization among parties, no matter the degree of commitment. The frequency of political turnover does not produce quantitatively relevant effects. These results are consistent with much of the existing empirical evidence. Finally, we find that in the presence of political disagreement the welfare gains of building commitment are lower

Topics: Time-Consistency, Political Disagreement We are thankful to Klaus Adam, Jordi Galí, Albert Marcet and Michael Reiter for many
Year: 2008
OAI identifier: oai:CiteSeerX.psu:10.1.1.352.3338
Provided by: CiteSeerX
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