The Optimal Structure for Public Debt

Wolfgang Kuhle

Metroeconomica, 2014, vol. 65, issue 2, 321-348

Abstract: We study risk-sharing through public debt in a two-generations-overlapping model. If bonds and wage-indexed social security service a given initial obligation, there exists a set of Pareto-efficient debt structures. This set is characterized by conflicting interests of current and yet unborn cohorts over the factor-price risk allocation. If both size and composition of the debt are choice variables, these conflicting interests can be reconciled. Changes in the debt's composition reallocate factor-price risks, while changes in its size reallocate resources. This separation of risk-sharing and crowding-out narrows the set of efficient debt structures until only one remains.

Date: 2014
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