Debt and Deficit Fluctuations in a Time-Consistent Setup

This paper compares the stochastic behavior of fiscal variables under optimal fiscal policy for the cases of full commitment (Ramsey problem) and partial commitment by the government (focusing on differentiable Markov perfect equilibrium). It shows that, around the steady state, the properties of the fiscal variables are very similar for both commitment assumptions. These conclusions are robust to two different specifications of the structure of public bonds (risk-free and state-contingent), and to different sets of the parameters. The cyclical properties of the fiscal variables, regardless of commitment assumptions, are determined by the parameters of the utility function