ECON 100B Lecture Notes - Lecture 22: Ricardian Equivalence, Byrsonima Crassifolia, Automatic Stabilizer

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15 Mar 2017
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In most advanced economies, the crisis has led to large budget de cits and a large increase in debt-to-gdp ratios. This calls for governments to reduce de cits, stabilize the debt, and reassure investors. The government budget constraint: de cits, debt, spending, and taxes. The budget de cit (in ation-adjusted de cit) equals spending, including real interest payments on the debt, minus taxes net of trasnfers. Government budget constraint: the change in government debt during year t equals the de cit during year t: The term (g-t( is called the primary de cit and (t-g) is called the primary surplus. If government spending is unchanged, a decrease in taxes must eventually be offset by an increase in taxes in the future. The longer the government waits to increase taxes, or the higher the real interest rate is, the higher the eventual increase in taxes must be. The legacy of past de cits is higher government debt today.

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