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 publiéDate
2017Journal name
Macroeconomic DynamicsVolume
21Number
8Publisher
Cambridge University Press
Pages
1996-2032
Publication identifier
Metadata
Show full item recordAbstract (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; E60Related items
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