Optimal Fiscal Policy Without Commitment: Revisiting Lucas-Stokey

Recognition Program

Authors: Davide Debortoli, Ricardo Nunes and Pierre Yared

Journal of Political Economy, Vol. 129, No 5, 1640-1665, May, 2021

According to the Lucas-Stokey result, a government can structure its debt maturity to guarantee commitment to optimal fiscal policy by future governments. In this paper, we overturn this conclusion, showing that it does not generally hold in the same model and under the same definition of time-consistency as in Lucas-Stokey. Our argument rests on the existence of an overlooked commitment problem that cannot be remedied with debt maturity: a government in the future will not tax on the downward sloping side of the La er curve, even if it is ex-ante optimal to do so.

This paper originally appeared as Barcelona School of Economics Working Paper 1144
This paper is acknowledged by the Barcelona School of Economics Recognition Program