Public Debt as Private Liquidity: Optimal Policy *

George-Marios Angeletos, Fabrice Collard and Harris Dellas ()
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George-Marios Angeletos: MIT Department of Economics - MIT - Massachusetts Institute of Technology
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

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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. * This paper supersedes an earlier draft, entitled "Optimal Public Debt Management and Liquidity Provision", which was concerned with the same topic but did not contain the present paper's theoretical contribution. We are grateful to Behzad Diba for his collaboration on the earlier project; to Pedro Teles and Per Krusell for illuminating discussions; and to various seminar participants for their feedback. Angeletos also thanks the University of Bern, Study Center Gerzensee, and the Swiss Finance Institute for their hospitality.

Date: 2023-01-02
New Economics Papers: this item is included in nep-dge and nep-fdg
Note: View the original document on HAL open archive server: https://hal.science/hal-03917771v1
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Citations: View citations in EconPapers (3)

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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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