All developed countries have government debt, usually a sizeable proportion of output. This paper proposes that governments that cannot commit to future policy choices face a trade-off that explains the level of debt. On the one hand, the government would like to increase debt and delay...

In this paper we address the time-inconsistency of optimal debt policy—the incentive for a current government to “manipulate interest ratesâ€â€”raised in Lucas and Stokey’s celebrated 1983 paper. The literature that followed suggested various ways to fully overcome...

We analyze the role of commitment in a dynamic principal-agent model of optimal insurance with hidden effort and observable but non-contractible savings. We argue that the optimal contract under full commitment is time-inconsistent. Consequently, we analyze the optimal time-consistent...

The conduct of fiscal and monetary policy absent commitment depends on the interaction between the objective of smoothing distortions intertemporally and a time-consistency problem. When net nominal government obligations are positive, both fiscal and monetary policies are distortionary and the...

This paper analyzes the Markov-perfect equilibrium of an economy were a benevolent government that lacks the ability to commit to future policy choices, uses taxes on capital and labor income to finance the provision of a public good. The main finding is that the government taxes capital and...

I study how the specific details of a micro founded monetary economy affect the determination of government policy. I consider three variants of the Lagos-Wright monetary framework: a benchmark were all markets are competitive; a case which allows for financial intermediaries; and a case with...

Making the central bank more independent from political pressures lowers inflation and increases the primary deficit, persistently. In the long-run, however, fiscal considerations are paramount and inflation comes back up to accommodate the higher financial burden of accumulated public debt....

January’s deal on the so-called fiscal cliff only raised projected revenue moderately and continued to push the spending issue forward unresolved. The economy may have been slowed down by such a drawn-out process, as well as by the uncertainty on the future size of government and on the...

U.S. gross domestic product (GDP) contracted significantly and persistently during the recent financial crisis and recession. Lessons can be learned from comparing the U.S. experience with that of other industrialized countries.

For a significant number of industries - representing roughly a quarter of the U.S. economy - the most recent recession has been business as usual when judged by pre-recession trends. For a slightly larger group of industries, mostly related to construction, manufacturing, and trade, the...