The Economic Effects of Restrictions on Government Budget Deficits: Imperfect Privte Credit Markets

Abstract

We consider a pure-exchange overlapping-generations model We consider a pure-exchange overlapping-generations model with many consumers per generation and many goods per period. As in Ghiglino and Shell (2000), there is a government that collects taxes, distributes transfers and faces budget deficit restrictions. We introduce, for realism and symmetry with the government, imperfection in the private credit markets. We find that with constraints on individual credit and anonymous (i.e., non-personalized) lump-sum taxes, strong (or 'global') irrelevance of the government budget deficit is not possible, and weak irrelevance can hold only in very special situations. With credit constraints and anonymous consumption taxes, weak irrelevance holds provided the number of tax instruments is sufficiently large and at least one consumer's credit constraint is not binding.