Optimal Public Debt Redux

30 Pages Posted: 16 Aug 2016 Last revised: 15 Jul 2017

See all articles by Santanu Chatterjee

Santanu Chatterjee

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

John Gibson

Georgia State University - Department of Economics

Felix K. Rioja

Georgia State University - Department of Economics

Date Written: July 11, 2017

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 publicdebt-GDP ratio for the U.S. observed during our sample period.

Keywords: infrastructure, public investment, heterogenous agents, public debt, welfare, transitional dynamics

JEL Classification: E2, E6, H3, H4, H6

Suggested Citation

Chatterjee, Santanu and Gibson, John and Rioja, Felix Korman, Optimal Public Debt Redux (July 11, 2017). Andrew Young School of Policy Studies Research Paper Series No. 16-13, Available at SSRN: https://ssrn.com/abstract=2824255 or http://dx.doi.org/10.2139/ssrn.2824255

Santanu Chatterjee (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Department of Economics
University of Georgia
Athens, GA 30602
United States
706-542-1709 (Phone)

HOME PAGE: http://https://sites.google.com/view/schatterjee/home

John Gibson

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Felix Korman Rioja

Georgia State University - Department of Economics ( email )

University Plaza
35 Broad Street
Atlanta, GA 30303
United States
404-651-0417 (Phone)
404-651-4985 (Fax)

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