Optimal Level of Government Debt: Matching Wealth Inequality and the Fiscal Sector

Edgar Vogel ()
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Edgar Vogel: Munich Center for the Economics of Aging (MEA), Postal: Amalienstr. 33, D-80799 Munich

No 201410, MEA discussion paper series from Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy

Abstract: We calibrate an incomplete markets large scale OLG model to the US income and wealth distribution and examine the effects of alternative government debt levels and adjustment policies on macroeconomic aggregates and welfare. We find that the government should hold negative debt. Due to the high degree of wealth and income dispersion ex ante lifetime utility increases with increasing wages (falling interest rates) by around 6% of lifetime consumption at optimal debt levels. The optimal level depends on the adjustment policy can vary by up to 70% of GDP (between -180% and -110%). With lower government debt, high income/wealth agents are always worse off. Adjusting transfers benefits the lowest income/wealth group. The largest gains are, however, experienced by agents in the middle of the income/wealth distribution: they benefit from higher wages and transfers but do not lose too much capital income.

JEL-codes: C54 C68 D52 D60 E20 E62 H2 H6 (search for similar items in EconPapers)
Date: 2014-04-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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