Abstract I develop a novel link between frictions in international financial markets and fiscal procyclicality. Complementing existing evidence, A decomposition of government expenditure into social spending and public good spending reveals that the cyclical correlation of social spending exhibits the biggest differences across countries. I build a small open economy model with income inequality, endogenous fiscal policy and sovereign default risk to rationalize this spending procyclicality. Government spending, divided into a public good and social spending, is financed by taxation and external debt. External debt is subject to endogenous risk premia because the government cannot commit to repay its debt. The government conducts a procyclical tax and social spending policy when debt is in or close to the risky zone. Social spending then only redistributes income, failing to smooth private consumption over time. Far away from the crisis zone, fiscal policy is countercyclical, only public goods spending is always procyclical. Social spending is cut most when the government faces positive risk premia, because it is better a substitute of private income than public good spending. It also accounts for the largest part in fiscal adjustment: because taxes are distortionary and cannot be targeted well. Fiscal procyclicality becomes stronger with higher economic inequality as revenue raising through taxation becomes more costly. JEL classification: E62, F34, F41.

Abstract: This paper develops a model of optimal debt maturity in which the government cannot issue statecontingent debt. As the literature has established, if the government can perfectly commit to fiscal policy, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust when lack of commitment is introduced. Under lack of commitment, large and tilted debt positions are very expensive to finance ex-ante since they ex-post exacerbate the government's problem stemming from a lack of commitment. In contrast, a flat maturity structure minimizes the cost entailed by a lack of commitment, though this structure also limits the ability to insure against shocks and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols.

Abstract This paper proposes a new approach to social cost-bene…t analysis using a model in which a benevolent government chooses risky projects in the presence of market failures and tax distortions. The government internalizes market failures and therefore perceives project payo¤s di¤erently than do individual private actors. This gives it a "social risk management" motive -projects that generate social bene…ts are attractive, particularly if those bene…ts are realized in bad economic states. However, because of tax distortions, government …nancing is costly, creating a "…scal risk management" motive. Government projects that require large tax-…nanced outlays are unattractive, particularly if those outlays tend to occur in bad economic times. At the optimum, the government trades o¤ its social and …scal risk management motives. Frictions in government …nancing create interdependence between two otherwise unrelated government projects. The …scal risk of a project depends on how its …scal costs covary with the …scal costs of the government's overall portfolio of projects. This interdependence means that individual projects cannot be evaluated in isolation. We thank John Campbell, Eduardo Davilla, Matt Weinzierl, and seminar participants at Harvard and Princeton for helpful comments. We gratefully acknowledge funding from the Harvard Business School Division of Research.

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This paper characterizes tax and debt dynamics in Ramsey plans for incomplete markets economies that generalize an Aiyagari et al. (2002) economy by allowing a single asset traded by the government to be risky. Long run debt and tax dynamics can be attracted not only to the first-best continuation allocations discovered by Aiyagari et al. for quasi-linear preferences, but instead to a continuation allocation associated with a level of (marginal-utility-scaled) government debt that would prevail in a Lucas-Stokey economy that starts from a particular initial level of government debt. The paper formulates, analyzes, and numerically solves Bellman equations for two value functions for a Ramsey planner, one for t ≥ 1, the other for t = 0.