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- Title
DEEP HABITS AND THE MACROECONOMIC EFFECTS OF GOVERNMENT DEBT.
- Authors
Aloui, Rym
- Abstract
In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a microfounded framework that combines time-varying markups, endogenous labor supply, and overlapping generations based on infinitely lived families. The main contribution of this paper is to provide a new transmission mechanism for public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of a positive shock to public debt. We show that the interest rate rises, entailing higher markups and a fall in employment and consumption. Interestingly, even without capital, a crowding-out effect of government debt is obtained in the long run. In addition, we show that when prices are sticky, public debt has a short-run expansionary effect, which is strengthened by the presence of deep habits.
- Subjects
MACROECONOMICS; PUBLIC debts; LABOR supply; TIME-varying systems; ECONOMIC shock; WEALTH effect (Economics); OVERLAPPING generations model (Economics)
- Publication
Macroeconomic Dynamics, 2013, Vol 17, Issue 8, p1659
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100512000259