Abstract:
This paper considers the implications of optimal taxation for the stochastic behaviour of debt and defi cit in the economy with discretionary government, focusing on Markov perfect equilibria. It concludes that in such time-consistent setup in case of market incompleteness the properties of the variables are very similar to those in the full commitment case. Moreover, debt shows more persistence than other variables and it increases in response to shocks that cause a higher de cit, which is in accordance with empirical evidence from U.S. data.