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Optimal policy with heterogeneous agents and aggregate shocks: An application to optimal public debt dynamics

François Legrand and Xavier Ragot ()
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François Legrand: EM Lyon

No 1272, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Abstract We show that allocations in incomplete insurance-market economies can be represented as the solution of the program of a constrained planner. This representation allows for solving Ramsey programs in incomplete-market economies with aggregate shocks, and thus determining optimal policies in such setups. We apply this framework to derive optimal public debt and fiscal policy after a technology, a government spending or an uncertainty shock. We find that, for any adverse shock, public debt decreases whereas capital taxes increases on impact. This policy limits the fall in capital after such shocks. Simulations of the optimal solutions can be obtained by simple perturbation methods.

New Economics Papers: this item is included in nep-mac and nep-pbe
Date: 2016
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