We provide sufficient conditions for the feasibility of a Pareto-improving fiscal policy when the risk-free interest rate on government bonds is below the growth rate (r g). We do so in the class of incomplete markets models pioneered by Bewley-Huggett-Aiyagari, but we allow for an arbitrary...

This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the...

Standard optimal capital tax theory abstracts from modeling asset prices, making it unsuitable for thinking about capital gains and wealth taxation. We study optimal redistributive taxation in an environment with asset price changes, adopting the modern finance view that asset prices fluctuate...

We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy and seeks to insure a risk averse domestic constituency. The expected tax on capital is shown to vary with the state of the economy,...

We provide a rationale for the observed pro-cyclicality of tax policies in emerging markets and present a novel mechanism through which tax policy amplifies the business cycle. Our explanation relies on two features of emerging markets: limited access to financial markets and limited commitment...

Business Cycles in emerging markets are characterized by strongly counter-cyclical current accounts, consumption volatility that exceeds income volatility and dramatic sudden stops' in capital inflows. These features contrast with developed small open economies and highlight the uniqueness of...

World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina's default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities...

We characterize fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the...

We propose a continuous time model of nominal debt and investigate the role of inflation credibility in the potential for self-fulfilling debt crises. Inflation is costly, but reduces the real value of outstanding debt without the full punishment of default. With high inflation credibility,...

Many households hold little wealth, especially liquid wealth. In precautionary savings models, absent preference heterogeneity, these households should display not only higher marginal propensities to consume (MPCs), but also lower average propensities to consume (APCs) and higher future...