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
TypeArticle accepté pour publication ou publié
Journal nameMacroeconomic Dynamics
Cambridge University Press
MetadataShow full item record
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 / Keywordspublic debt; aggregate risk; precautionary saving; credit constraints; H60; H30; E32; E60
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