We analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes, nominal rigidities, nominal debt of various maturities and short-selling constraints. Optimal policy prescribes the almost exclusive use of long term debt. Such debt mitigates the distortions...

This paper considers the political credibility of allocations in settings with dynamic private information. It embeds a benchmark dynamic moral environment into political economy games which feature repeated voting over mechanisms. Optimal politically credible allocations are shown to solve...