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Public Debt And Aggregate Risk

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  • Desbonnet, Audrey
  • Kankanamge, Sumudu

Abstract

In this paper, we investigate the importance of aggregate fluctuations for the assessment of the optimal level of public debt in an incomplete-markets economy. We start by building a steady state model in which households are only subject to uninsurable idiosyncratic risk and evaluate the optimal level of public debt. We then augment the model to allow for aggregate risk and measure the impact on the optimal level. We show that the cyclical behavior of the economy has a quantitative impact on this level that can be decomposed into the effects of the aggregate productivity shock and the cyclicality of unemployment. Moreover, we find that matching wealth distribution statistics substantially changes the optimal level of public debt.

Suggested Citation

  • Desbonnet, Audrey & Kankanamge, Sumudu, 2017. "Public Debt And Aggregate Risk," Macroeconomic Dynamics, Cambridge University Press, vol. 21(8), pages 1996-2032, December.
    • Handle: RePEc:cup:macdyn:v:21:y:2017:i:08:p:1996-2032_00
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    2. Cozzi, Marco, 2023. "Public debt and welfare in a quantitative Schumpeterian growth model with incomplete markets," Journal of Macroeconomics, Elsevier, vol. 77(C).
    3. Javier Andrés & Javier J. Pérez & Juan A. Rojas, 2017. "Implicit public debt thresholds: an empirical exercise for the case of Spain," Working Papers 1701, Banco de España.
    4. Zhang, Yuewen, 2010. "Sovereign Risk Management in Recession: The Cases of Sweden and China," MPRA Paper 23364, University Library of Munich, Germany.
    5. Petia Topalova & Dan Nyberg, 2010. "What Level of Public Debt Could India Target?," IMF Working Papers 2010/007, International Monetary Fund.
    6. Marco Cozzi, 2019. "Has the Canadian Public Debt Been Too High? A Quantitative Assessment," Department Discussion Papers 1901, Department of Economics, University of Victoria.
    7. Bettoni, Luis G. & Santos, Marcelo, 2023. "Optimal fiscal policy in incomplete market business cycle economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 218-226.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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