Managing government debt, taxes and public investment

Juan Peng, Zian Tang, Jinqiang Yang and Zhanhao Zhang

Economics Letters, 2025, vol. 247, issue C

Abstract: In this paper, we construct a dynamic model to study government debt and fiscal policy, where we refine the government spending component by separately considering government investment. We find that incorporating government investment increases both the household’s value and the government’s sustainable debt capacity. However, due to the additional funding requirements brought about by government investment, the marginal cost of servicing debt and the optimal tax rate both increase. Finally, we find that the optimal ratio of government investment to capital decreases as the debt level rises.

Keywords: Sovereign debt; Default; Limited commitment; Investment; Debt sustainability (search for similar items in EconPapers)
JEL-codes: E44 E62 H21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176525000291

DOI: 10.1016/j.econlet.2025.112192

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