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DEEP HABITS AND THE MACROECONOMIC EFFECTS OF GOVERNMENT DEBT

Published online by Cambridge University Press:  13 March 2013

Rym Aloui
Rym Aloui*
Affiliation:
HEC Montréal
*
Address correspondence to: Rym Aloui, HEC Montréal, Institute of Applied Economics, 3000, chemin de la Côte-Sainte-Catherine, Montréal, Québec H3T 2A7, Canada; e-mail: rym.aloui@hec.ca.
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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.

Keywords

Wealth EffectsPublic Debt ShockDeep HabitsOverlapping Generations
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 8 , December 2013 , pp. 1659 - 1686
Copyright
Copyright © Cambridge University Press 2013 

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