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Can Public Debt Crowd in Private Investment?

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Listed:
  • Stohler, Fabio
  • Bayer, Christian

Abstract

If households self‐select into a risky high‐income state through investment, increased government debt can stimulate investment and improve welfare. In a heterogeneous agent endogenous growth model, government debt helps households smooth consumption and encourages investment in risky, high‐return assets, crowding in aggregate growth. However, when debt becomes excessive, capital crowding out and distortionary taxation negate these benefits. Using a model calibrated to U.S. data, we show that this crowding‐in effect suggests a higher optimal debt‐to‐GDP ratio than currently observed.
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Suggested Citation

  • Stohler, Fabio & Bayer, Christian, 2025. "Can Public Debt Crowd in Private Investment?," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325410, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc25:325410
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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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