Optimal Public Debt Management and Liquidity Provision

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

No 18800, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the Ramsey policy problem in an economy in which firms face a collateral constraint. Issuing more public debt alleviates this friction by increasing the aggregate quantity of collateral. In so doing, however, the issuance of more debt also raises interest rates, which in turn increases the tax burden of servicing the entire outstanding debt. We first document how this trade-off upsets the optimality of tax smoothing and, in contrast to the standard paradigm, helps induce a unique and stable steady-state level of debt in the deterministic version of the model. We next study the optimal policy response to fiscal and financial shocks in the stochastic version. We finally show how the results extend to a variant model in which the financial friction afflicts consumers rather than firms.

JEL-codes: E4 E6 H6 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Note: EFG ME
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