Public debt and aggregate risk

Audrey Desbonnet () and Sumudu Kankanamge
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Audrey Desbonnet: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Universität Wien = University of Vienna

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Abstract: This paper assesses the long-run optimal level of public debt in a framework where aggregate fluctuations are taken into account. Households are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against risk. We find that the long-run optimal level of public debt is generally higher in a setting embedding aggregate fluctuations than in a setting without. Aggregate fluctuations modify both the cost and the motive for precautionary saving. Higher levels of public debt, by effectively reducing the cost of precautionary saving, help agents to smooth consumption when they face price and employment fluctuations.

Keywords: credit constraints; Public debt; aggregate risk; precautionary saving; Dette publique; risque agrégé; épargne de précaution; contrainte de crédit (search for similar items in EconPapers)
Date: 2008-08
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00175877v2
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Published in 2008

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Related works:
Journal Article: PUBLIC DEBT AND AGGREGATE RISK (2017)
Working Paper: Public debt and aggregate risk (2008)
Working Paper: Public debt and aggregate risk (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00175877

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