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A Ramsey Theory of Financial Distortions

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  • Marco Bassetto
  • Wei Cui
Abstract
The return on government debt is lower than that of assets with similar payoffs. We study optimal debt management and taxation when the government cannot directly redistribute toward the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. Optimal government debt provision calls for gradually closing the wedge between the returns as much as possible, but tax policy may work as a countervailing force: as long as financial frictions bind, it can be optimal to tax capital even if this magnifies the discrepancy in returns.

Suggested Citation

  • Marco Bassetto & Wei Cui, 2024. "A Ramsey Theory of Financial Distortions," Journal of Political Economy, University of Chicago Press, vol. 132(8), pages 2612-2654.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/729446
    DOI: 10.1086/729446
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    Cited by:

    1. George-Marios Angeletos & Fabrice Collard & Harris Dellas, 2023. "Public Debt as Private Liquidity: Optimal Policy," Journal of Political Economy, University of Chicago Press, vol. 131(11), pages 3233-3264.
    2. Cao, Qingqing, 2024. "Optimal fiscal and monetary policy with collateral constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 161(C).
    3. Boar, Corina & Knowles, Matthew, 2024. "Optimal taxation of risky entrepreneurial capital," Journal of Public Economics, Elsevier, vol. 234(C).
    4. Chien, YiLi & Wen, Yi, 2022. "The determination of public debt under both aggregate and idiosyncratic uncertainty," Journal of Economic Theory, Elsevier, vol. 203(C).
    5. Ricardo Reis, 2022. "Debt Revenue and the Sustainability of Public Debt," Journal of Economic Perspectives, American Economic Association, vol. 36(4), pages 103-124, Fall.
    6. He, Ping & Liu, Zehao & Xie, Chengbo, 2023. "A fiscal theory of money and bank liquidity provision," Journal of Economic Theory, Elsevier, vol. 214(C).
    7. Chien, YiLi & Wen, Yi, 2021. "Time-inconsistent optimal quantity of debt," European Economic Review, Elsevier, vol. 140(C).

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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