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Alesina Drazen (1991) - Why Are Stabilizations Delayed (view source)
Revision as of 16:41, 4 November 2011
, 16:41, 4 November 2011→The Model
==The Model==
Until <math>t=0\,</math> the budget is balanced, with debt . At <math>b_0 \ge t=0\,</math>. At a shock hits reducing tax revenues, which implies with debt <math>t=b \ge 0\,</math> a shock hits reducing tax revenues. After <math>t=0\,</math> until stabilization, <math>(1-\gamma)\,</math> of government expenditure including interest payments is covered by issuing debt, and <math>\gamma\,</math> is covered by distortionary taxation, where <math>\gamma >0\,</math> but not fixed.
Denoting <math>g_0\,</math> as the level of expenditure, debt <math>b(t)\,</math> evolves according to:
<math>\frac{db}{dt} = \underbrace{(1-\gamma)}_{deficit}[rb(t) + g_0]\,</math>
