Public debt and aggregate risk

Audrey Desbonnet and Sumudu Kankanamge
Additional contact information
Audrey Desbonnet: Centre d'Economie de la Sorbonne

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: This paper assesses the optimal level of public debt in a new framework where aggregate fluctuations are taken into account. Agents are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against the risk. We find that the optimal level of debt is very different when aggregate risk is taken into account: a simple idiosyncratic model generates a quarterly optimal level of debt of 60 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP. Thus aggregate fluctuations have a strong positive impact on the level of public debt in the economy. Aggregate fluctuations exacerbate the overall risk level in the economy and households are forced to increase their precautionary saving in response. Public debt and the implied higher interest rate generate a strong effect that helps precautionary saving behavior

Keywords: debt; aggregate risk; precautionary saving (search for similar items in EconPapers)
JEL-codes: E32 E63 H31 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2007-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Published in Macroeconomic Dynamics, 21, (8), 2017, pp.1996-2032

Downloads: (external link)
https://shs.hal.science/halshs-00175877 (application/pdf)
https://doi.org/10.1017/S1365100516000092

Related works:
Journal Article: PUBLIC DEBT AND AGGREGATE RISK (2017)
Working Paper: Public debt and aggregate risk (2016)
Working Paper: Public debt and aggregate risk (2008)
Working Paper: Public debt and aggregate risk (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:v07042

Access Statistics for this paper

More papers in Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne Contact information at EDIRC.
Bibliographic data for series maintained by Lucie Label ().