Public debt and aggregate risk

Desbonnet, Audrey and Kankanamge, Sumudu (2016) Public debt and aggregate risk. TSE Working Paper, n. 16-658

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Official URL: http://tse-fr.eu/pub/30492

Abstract

In this paper, we investigate the importance of aggregate fluctuations for the assessment 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 wealth distribution statistics substantially changes the optimal level of public debt.

Item Type: Monograph (Working Paper)
Language: English
Date: May 2016
Uncontrolled Keywords: public debt, aggregate risk, precautionary saving, credit constraints
JEL codes: E32 - Business Fluctuations; Cycles
E60 - General
H30 - General
H60 - General
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 01 Jun 2016 09:38
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:30492
URI: http://publications.ut-capitole.fr/id/eprint/22047

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