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Optimal public debt redux

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  • Chatterjee, Santanu
  • Gibson, John
  • Rioja, Felix

Abstract

We examine the role played by government investment in infrastructure in determining the optimal quantity of public debt in a heterogeneous agent economy with incomplete insurance markets. Calibrating our model to the key aggregate and distributional moments of the U.S. economy for the period 1990–2015, we show that (i) the inclusion of infrastructure, and (ii) transitional dynamics between stationary states critically affect the characterization of the optimal level of public debt. Our results indicate that the inclusion of public infrastructure in the model specification implies a lower optimal debt level relative to the specification without infrastructure, both when comparing stationary equilibria and when accounting for transitional dynamics. When welfare comparisons are made by comparing stationary equilibria, we find that it is optimal for the government to accumulate assets (public surplus). However, once transitional dynamics are accounted for, accumulating debt becomes optimal, with the optimal share implied by our model being significantly higher than the average public debt-GDP ratio for the U.S. observed during our sample period.

Suggested Citation

  • Chatterjee, Santanu & Gibson, John & Rioja, Felix, 2017. "Optimal public debt redux," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 162-174.
  • Handle: RePEc:eee:dyncon:v:83:y:2017:i:c:p:162-174
    DOI: 10.1016/j.jedc.2017.08.005
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    Cited by:

    1. Gibson John & Rioja Felix, 2020. "The welfare effects of infrastructure investment in a heterogeneous agents economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-17, January.
    2. John Gibson & James P Henson, 2016. "Getting the most from MATLAB: ditching canned routines and embracing coder," Economics Bulletin, AccessEcon, vol. 36(4), pages 2519-2525.
    3. Kose, Ayhan & Ohnsorge, Franziska & Sugawara, Naotaka, 2020. "Benefits and Costs of Debt: The Dose Makes the Poison," CEPR Discussion Papers 14439, C.E.P.R. Discussion Papers.
    4. Erauskin, Iñaki & Turnovsky, Stephen J., 2020. "Financial globalization and its consequences for productive government expenditure," Journal of Macroeconomics, Elsevier, vol. 66(C).
    5. Ludovit Odor, 2016. "What should we include in the Fiscal Space Review?," Discussion Papers Discussion Paper No. 5/20, Council for Budget Responsibility.
    6. Zuzana Mucka & Ludovit Odor, 2018. "Optimal sovereign debt: Case of Slovakia," Working Papers Working Paper No. 3/2018, Council for Budget Responsibility.
    7. Marco Cozzi, 2019. "Has the Canadian Public Debt Been Too High? A Quantitative Assessment," Department Discussion Papers 1901, Department of Economics, University of Victoria.
    8. William B. Peterman & Erick Sager, 2018. "Optimal Public Debt with Life Cycle Motives," Finance and Economics Discussion Series 2018-028, Board of Governors of the Federal Reserve System (U.S.).
    9. Chatterjee, Santanu & Gibson, John & Rioja, Felix, 2018. "Public investment, debt, and welfare: A quantitative analysis," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 204-217.

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    More about this item

    Keywords

    Infrastructure; Public investment; Heterogeneous agents; Public debt; Welfare; Transitional dynamics;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H4 - Public Economics - - Publicly Provided Goods
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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