Public debt as private liquidity: optimal policy

George-Marios Angeletos, Fabrice Collard () and Harris Dellas ()
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George-Marios Angeletos: Northwestern University [Evanston]
Fabrice Collard: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique

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Abstract: We study optimal policy in an economy where interest rates are low because public debt serves as collateral or buffer stock. Issuing more public debt raises welfare by easing the underlying friction but also reduces the private valuation of this service, raising interest rates. This trade-off shapes the optimal quantity of public debt in the long run, justifies a departure from tax smoothing in the short run, and calls for larger deficits during financial crises. Our analysis illustrates the possible robustness of these insights to different microfoundations and helps clarify when exactly low interest rates represent an opportunity for cheap government borrowing.

Date: 2023-11
Note: View the original document on HAL open archive server: https://hal.science/hal-04315922v1
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Published in Journal of Political Economy, 2023, 131 (11), ⟨10.1086/725170⟩

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Related works:
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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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04315922

DOI: 10.1086/725170

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