TY - JOUR
T1 - Uncertainty and the neutrality of government financing policy
AU - Chan, Louis Kuo Chi
PY - 1983
Y1 - 1983
N2 - Some ideas from the theory of finance are applied to consider whether debt-financed tax cuts affect desired consumption. It is shown that government financing policy is a matter of indifference to infinitely-lived households, if a perfect substitute for public debt exists. The analysis allows for uncertainty about future taxes, and for missing markets in some kinds of assets. Income redistribution risk, and the public insurance aspects of an income tax scheme, qualify this neutrality result, but in general the net effect is ambiguous. The real resource costs of financial transacting, as well as government superiority in the intermediation process, may be one rationale for activist debt-management policy. A better understanding of functioning capital markets is essential to evaluate these arguments.
AB - Some ideas from the theory of finance are applied to consider whether debt-financed tax cuts affect desired consumption. It is shown that government financing policy is a matter of indifference to infinitely-lived households, if a perfect substitute for public debt exists. The analysis allows for uncertainty about future taxes, and for missing markets in some kinds of assets. Income redistribution risk, and the public insurance aspects of an income tax scheme, qualify this neutrality result, but in general the net effect is ambiguous. The real resource costs of financial transacting, as well as government superiority in the intermediation process, may be one rationale for activist debt-management policy. A better understanding of functioning capital markets is essential to evaluate these arguments.
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U2 - 10.1016/0304-3932(83)90024-7
DO - 10.1016/0304-3932(83)90024-7
M3 - Article
AN - SCOPUS:0000990868
VL - 11
SP - 351
EP - 372
JO - Carnegie-Rochester Confer. Series on Public Policy
JF - Carnegie-Rochester Confer. Series on Public Policy
SN - 0304-3932
IS - 3
ER -