Public Debt as Private Liquidity: Optimal Policy

Fabrice Collard, Harris Dellas () and George-Marios Angeletos

No 15488, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study optimal policy in an economy in which public debt is used as collateral or liquidity buffer. Issuing more public debt raises welfare by easing the underlying financial friction; but this easing lowers the liquidity premium and increases the government's cost of borrowing. These considerations, which are absent in the basic Ramsey paradigm, help pin down a unique, long-run level of public debt. They require a front-loaded tax response to government-spending shocks, instead of tax smoothing. And they explain why a financial recession, more than a traditional one, makes government borrowing cheaper, optimally supporting larger fiscal stimuli.

Keywords: Piblic debt; Private liquidity; Optimal policy (search for similar items in EconPapers)
JEL-codes: E62 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Public Debt as Private Liquidity: Optimal Policy (2023)
Working Paper: Public debt as private liquidity: optimal policy (2023)
Working Paper: Public Debt as Private Liquidity: Optimal Policy * (2023)
Working Paper: Public Debt as Private Liquidity: Optimal Policy (2022)
Working Paper: Public Debt as Private Liquidity: Optimal Policy (2021)
Working Paper: Public Debt as Private Liquidity: Optimal Policy (2020)
Working Paper: Public Debt as Private Liquidity: Optimal Policy (2016)
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