Optimal Public Debt with Life Cycle Motives

William Peterman and Erick Sager

American Economic Journal: Macroeconomics, 2022, vol. 14, issue 4, 404-37

Abstract: This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation in consumption, labor, and savings. We find that public savings—not public debt—equal to 168 percent of output is optimal, primarily due to the influence of the life cycle on household decision-making. By inducing a lower interest rate, public savings slow consumption and leisure growth over an average household's lifetime, and the resulting flatter allocation of lifetime consumption and leisure improves welfare. These life cycle welfare benefits are large—on net, they outweigh the transitional costs from a tax-financed public debt elimination.

JEL-codes: D15 D52 E21 E43 E62 G51 H63 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Optimal Public Debt with Life Cycle Motives (2018)
Working Paper: Optimal Public Debt with Life Cycle Motives (2018)
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DOI: 10.1257/mac.20180247

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