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Public debt and aggregate risk

Desbonnet, Audrey; Kankanamge, Sumudu (2017), Public debt and aggregate risk, Macroeconomic Dynamics, 21, 8, p. 1996-2032. 10.1017/S1365100516000092

Type
Article accepté pour publication ou publié
Date
2017
Journal name
Macroeconomic Dynamics
Volume
21
Number
8
Publisher
Cambridge University Press
Pages
1996-2032
Publication identifier
10.1017/S1365100516000092
Metadata
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Author(s)
Desbonnet, Audrey
Kankanamge, Sumudu
Abstract (EN)
In this paper, we investigate the importance of aggregate fluctuations for theassessment of the optimal level of public debt in an incomplete markets economy. We start by building a steady state model in which households are only subject to uninsurable idiosyncratic risk and evaluate the optimal level of public debt. We then augment the model to allow for aggregate risk and measure the impact on the optimal level. We show that the cyclical behavior of the economy has a quantitative impact on this level that can be decomposed into the effects of the aggregate productivity shock and the cyclicality of unemployment. Moreover, we find that matching wealthdistribution statistics substantially changes the optimal level of public debt.
Subjects / Keywords
public debt; aggregate risk; precautionary saving; credit constraints; H60; H30; E32; E60
JEL
H60 - General
H30 - General
E32 - Business Fluctuations; Cycles
E60 - General

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