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Public debt and aggregate risk

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Date
2017
Dewey
Macroéconomie
Sujet
public debt; aggregate risk; precautionary saving; credit constraints; H60; H30; E32; E60
JEL code
H.H6.H60; H.H3.H30; E.E3.E32; E.E6.E60
Journal issue
Macroeconomic Dynamics
Volume
21
Number
8
Publication date
2017
Article pages
1996-2032
Publisher
Cambridge University Press
DOI
http://dx.doi.org/10.1017/S1365100516000092
Forthcoming
oui
URI
https://basepub.dauphine.fr/handle/123456789/16991
Collections
  • LEDa : Publications
Metadata
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Author
Desbonnet, Audrey
Kankanamge, Sumudu
Type
Article accepté pour publication ou publié
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.

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