Discussion paper

DP9088 Public Debt and Redistribution with Borrowing Constraints

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically, are contractionary; the present-value multiplier on consumption is, however, zero. With sticky prices, Ricardian equivalence always fails. A Robin-Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform cut in taxes financed with public debt has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.


Perotti, R, T Monacelli and F Bilbiie (2012), ‘DP9088 Public Debt and Redistribution with Borrowing Constraints‘, CEPR Discussion Paper No. 9088. CEPR Press, Paris & London. https://cepr.org/publications/dp9088