Creator

• Bassetto, Marco
• Cui, Wei

Series

• Staff report (Federal Reserve Bank of Minneapolis. Research Department)

Issue number

• 643

Date created

• 2023-02-28

Abstract

• The return on government debt is lower than that of asset with similar payoffs. We study optimal debt management and taxation when the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. Optimal government debt provision calls for gradually closing the wedge between the returns as much as possible, but tax policy may work as a countervailing force: as long as financial frictions bind, it can be optimal to tax capital even if this magnifies the discrepancy in returns.

Subject (JEL)

• E22 - Investment; Capital; Intangible Capital; Capacity
• E62 - Fiscal Policy
• E44 - Financial Markets and the Macroeconomy

Keyword

• Capital tax
• Financing constraints
• Asset liquidity
• Optimal level of government debt
• Low interest rates

Related information

• An earlier version of this Staff Report circulated as Working Paper 775.

  Published in: Journal of Political Economy (Vol. 132, Iss. 8, August 2024, pp. 2612-2654), https://doi.org/10.1086/729446.

Date modified

• 08/26/2024

Corporate Author

• Federal Reserve Bank of Minneapolis. Research Department

Publisher

• Federal Reserve Bank of Minneapolis

Resource type

• Research Paper

DOI

•  https://doi.org/10.21034/sr.643

License

• Creative Commons BY-NC Attribution-NonCommercial 4.0 International

In Collection:

• Staff Reports

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