In this paper, we investigate the interactions between public debt and transfer policies in a framework based on Floden , that we extend to allow for transitional dynamics between steady states. First, we show that, starting from a high level of public debt, it is possible to implement a policy that reduces public debt without generating welfare losses, as long as it is associated with transitory transfers adjustments. Secondly, we define and compute an equilibrium that takes into consideration the government’s incentive to implement unexpected adjustments in both public debt and transfers. We show that the long run equilibrium over public debt and transfers in Floden  is not stable with respect to these short term incentives. Simulations reveal that our equilibrium and Floden ’s one considerably differ in quantitative terms.
Fiscal Policy; Public Debt; Transfers; Transition;
Revue d'Économie Politique, vol. 122, n. 6, 2012, pp. 903–920