International Finance Discussion Papers (IFDP)
September 1998
Two Equivalence Theorems for Government Finance
Dahai Yu
Abstract:
This paper studies the effects of a path change in government debt composition and aggregate transfers on allocations and prices. It is shown that the effects are zero under some agent-specific transfer scheme even when markets are incomplete. If markets are complete, then the effects are zero under any transfer scheme that leaves each agent's lifetime resource unchanged if and only if agents are always collectively compensated for next period's return change. The infinite-horizon framework used has an arbitrary number of assets with arbitrary returns and an arbitrary mixture of finitely and infinitely lived agents.
Full paper (711 KB Postscript)Keywords: Debt composition, Ricardian equivalence, general equilibrium
PDF: Full Paper
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