Optimal public debt redux |
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Institution: | 1. Department of Economics, University of Georgia, Athens, GA 30602, USA;2. Department of Economics, Georgia State University, Atlanta, GA 30303, USA |
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Abstract: | We examine the role played by government investment in infrastructure in determining the optimal quantity of public debt in a heterogeneous agent economy with incomplete insurance markets. Calibrating our model to the key aggregate and distributional moments of the U.S. economy for the period 1990–2015, we show that (i) the inclusion of infrastructure, and (ii) transitional dynamics between stationary states critically affect the characterization of the optimal level of public debt. Our results indicate that the inclusion of public infrastructure in the model specification implies a lower optimal debt level relative to the specification without infrastructure, both when comparing stationary equilibria and when accounting for transitional dynamics. When welfare comparisons are made by comparing stationary equilibria, we find that it is optimal for the government to accumulate assets (public surplus). However, once transitional dynamics are accounted for, accumulating debt becomes optimal, with the optimal share implied by our model being significantly higher than the average public debt-GDP ratio for the U.S. observed during our sample period. |
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