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Alternative Perspectives on Optimal Public Debt Adjustment

  • Horvath Michal

    ()

    (University of Oxford)

We compare alternative optimal public debt adjustment strategies in a New Keynesian economy. We find that the unconditionally optimal policy is consistent with a gradual adjustment in public debt towards its mean value at a speed determined by the rate of time preference of agents. To a second-order approximation in a stochastic setting, debt follows a unit root process with a negative drift under the `timeless-perspective' approach but converges to an unconditional mean different from the non-stochastic steady state in the unconditionally optimal economy. Overall, increases in public debt are shown to be optimally reduced by half only after approximately two decades at best.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 11 (2011)
Issue (Month): 1 (November)
Pages: 1-22

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Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:34
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