Public Debt and the Balance Sheet of the Private Sector

Hans Gersbach, Jean Rochet and Ernst-Ludwig von Thadden

No 23-1412, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper studies the impact of corporate political influence on fiscal policy. We in-troduce different interest groups, firms and households, into a simple growth model with incomplete markets and heterogeneous agents. Firms face non-insurable id-iosyncratic productivity shocks. They finance their productive investments by issu-ing bonds but cannot issue equity. Households’ savings are invested into corporate bonds and public debt. The government selects the levels of taxes and public debt so as to maximize a weighted sum of the welfares of firms’owners and households. More government debt reduces corporate leverage, increases the risk free rate r and decreases the growth rate g. A. The weight of firms in social welfare determines whether r g at the optimum, with different dynamics in both regimes.

Keywords: Incomplete Financial Markets; Debt, Interest; Growth; Ponzi Games; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: E44 E62 (search for similar items in EconPapers)
Date: 2023-03-03
New Economics Papers: this item is included in nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:127930

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