The determination of public debt under both aggregate and idiosyncratic uncertainty

YiLi Chien and Yi Wen

Journal of Economic Theory, 2022, vol. 203, issue C

Abstract: We use an analytically tractable, heterogeneous-agent incomplete-markets model to show that the Ramsey planner's decision to finance stochastic public expenditures implies a departure from tax smoothing and an endogenous mean-reverting force to support positive debt growth despite the government's precautionary saving motives. Specifically, the government's attempt to balance the competing incentives between its own precautionary saving (tax smoothing) and households' precautionary saving (individual consumption smoothing)—even at the cost of extra tax distortion—implies an endogenous, soft lower bound on the stochastic unit-root dynamics of optimal taxes and public debt.

Keywords: Optimal public debt; Tax smoothing; Ramsey problem; Incomplete markets (search for similar items in EconPapers)
JEL-codes: E13 E62 H21 H30 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Working Paper: The Determination of Public Debt under both Aggregate and Idiosyncratic Uncertainty (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:203:y:2022:i:c:s0022053122000643

DOI: 10.1016/j.jet.2022.105474

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