Optimal Public Debt with Life Cycle Motives
American Economic Journal: Macroeconomics
vol. 14,
no. 4, October 2022
(pp. 404-37)
Abstract
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.Citation
Peterman, William B., and Erick Sager. 2022. "Optimal Public Debt with Life Cycle Motives." American Economic Journal: Macroeconomics, 14 (4): 404-37. DOI: 10.1257/mac.20180247Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- D52 Incomplete Markets
- E21 Macroeconomics: Consumption; Saving; Wealth
- E43 Interest Rates: Determination, Term Structure, and Effects
- E62 Fiscal Policy
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H63 National Debt; Debt Management; Sovereign Debt
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