Restraints on the public budget may limit the ability of the public sector to use financial markets for the diversification of shocks. This interferes with the role of the public budget as a buffer which may provide insurance by stabilizing income and thereby private consumption. We consider...

Restraints on the public budget limit the ability of the public sector to use financial markets for intertemporal substitution. This interferes with the role of the public budget as a buffer which provides insurance and possibly stabilizes income and thereby private consumption. We consider this...