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Public Debt and Redistribution with Borrowing Constraints


  • We are grateful to Pablo Winant for his exceptional assistance with solving non-linear models with occasionally binding constraints, as well as to the Editor, Wouter Den Haan, and an anonymous referee for useful comments. Bilbiie thanks the Banque de France for financial support through the eponymous Chair at the Paris School of Economics, and New York University–Abu Dhabi for hospitality during part of writing this article. Monacelli gratefully acknowledges the contribution of 2012-15 ERC Grant FINIMPMACRO. The views expressed are those of the authors and do not necessarily reflect official views or policies of the Banque de France.

Corresponding author: Florin Bilbiie, Centre d'Economie de la Sorbonne, 106-112 Boulevard de l'Hopital, 75013 Paris, France. Email:


We build a model with financial imperfections and heterogeneous agents and analyse the effects of two types of fiscal policy: revenue-neutral, intratemporal redistribution; and debt-financed tax cuts, which we interpret as intertemporal redistribution. Under flexible prices, the two policies are either neutral or display effects that are at odds with the empirical evidence. With sticky prices, Ricardian equivalence always fails. A Robin Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform, debt-financed tax cut has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.