Optimal public debt with life cycle motives by William B. Peterman and Erick Sager
By: Peterman, William B
.
Contributor(s): Sager, Erick.
Material type: 
ArticleSubject(s): MERCADO DE TRABAJO | DEUDA PUBLICA | AHORRO | CICLOS ECONOMICOS | BIENESTAR SOCIAL | VIVIENDA | ESTADOS UNIDOS
In:
American Economic Journal : Macroeconomics v. 14, n. 4, October 2022, p. 404-437Summary: This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation in consumption, labor, and savings. We find that public savings—not public debt—equal to 168 percent of output is optimal, primarily due to the influence of the life cycle on household decision-making. By inducing a lower interest rate, public savings slow consumption and leisure growth over an average household's lifetime, and the resulting flatter allocation of lifetime consumption and leisure improves welfare. These life cycle welfare benefits are large—on net, they outweigh the transitional costs from a tax-financed public debt elimination.
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This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation in consumption, labor, and savings. We find that public savings—not public debt—equal to 168 percent of output is optimal, primarily due to the influence of the life cycle on household decision-making. By inducing a lower interest rate, public savings slow consumption and leisure growth over an average household's lifetime, and the resulting flatter allocation of lifetime consumption and leisure improves welfare. These life cycle welfare benefits are large—on net, they outweigh the transitional costs from a tax-financed public debt elimination.
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