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Optimal public debt redux

Santanu Chatterjee (), John Gibson and Felix Rioja

Journal of Economic Dynamics and Control, 2017, vol. 83, issue C, 162-174

Abstract: We examine the role played by government investment in infrastructure in determining the optimal quantity of public debt in a heterogeneous agent economy with incomplete insurance markets. Calibrating our model to the key aggregate and distributional moments of the U.S. economy for the period 1990–2015, we show that (i) the inclusion of infrastructure, and (ii) transitional dynamics between stationary states critically affect the characterization of the optimal level of public debt. Our results indicate that the inclusion of public infrastructure in the model specification implies a lower optimal debt level relative to the specification without infrastructure, both when comparing stationary equilibria and when accounting for transitional dynamics. When welfare comparisons are made by comparing stationary equilibria, we find that it is optimal for the government to accumulate assets (public surplus). However, once transitional dynamics are accounted for, accumulating debt becomes optimal, with the optimal share implied by our model being significantly higher than the average public debt-GDP ratio for the U.S. observed during our sample period.

Keywords: Infrastructure; Public investment; Heterogeneous agents; Public debt; Welfare; Transitional dynamics (search for similar items in EconPapers)
JEL-codes: E2 E6 H3 H4 H6 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jedc.2017.08.005

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