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Alesina Drazen (1991) - Why Are Stabilizations Delayed (view source)
Revision as of 22:28, 25 May 2010
, 22:28, 25 May 2010no edit summary
*This page is referenced in [[BPP Field Exam Papers]]
==The Model==
Until <math>t=0 \,</math> the budget is balanced, with debt <math>b_0 \ge 0\,</math>. At <math>t=0\,</math> a shock hits reducing tax revenues. After <math>t=0\,</math> until stabilization, <math>(1-\gamma)\,</math> of government expenditure including interest payments is covered by issuing debt, and <math>\gamma\,</math> is covered by distortionary taxation, where <math>\gamma >0\,</math> but not fixed.
Denoting <math>g_0\,</math> as the level of expenditure, debt <math>b(t)\,</math> evolves according to:
where <math>r \,</math> is a constant interest rate.
This solves to:
If <math>\alpha = \frac{1}{2}\,</math> then stabilization occurs immediately, whereas the greater the disparity, the longer the period until stabilization.
*If there is politcal cohesion (<math>(\alpha = \frac{1}{2})\,</math>) then the burden is shared equally.*When there is no cohesion (<math>(\alpha =1)\,</math>) the relative burden of stabilization is more unequally borne, and the gain in holding out hoping that your opponent will concede is greater.
