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The Optimal Structure for Public Debt

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  • Wolfgang Kuhle

Abstract

We study risk-sharing through public debt in a two-generations-overlapping model. If bonds and wage-indexed social security service a given initial obligation, there exists a set of Pareto-efficient debt structures. This set is characterized by conflicting interests of current and yet unborn cohorts over the factor-price risk allocation. If both size and composition of the debt are choice variables, these conflicting interests can be reconciled. Changes in the debt's composition reallocate factor-price risks, while changes in its size reallocate resources. This separation of risk-sharing and crowding-out narrows the set of efficient debt structures until only one remains.

Suggested Citation

  • Wolfgang Kuhle, 2014. "The Optimal Structure for Public Debt," Metroeconomica, Wiley Blackwell, vol. 65(2), pages 321-348, May.
  • Handle: RePEc:bla:metroe:v:65:y:2014:i:2:p:321-348
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    File URL: http://hdl.handle.net/10.1111/meca.12044
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