American Economic Journal: Macroeconomics
no. 4, October 2022
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.
Peterman, William B., and Erick Sager.
"Optimal Public Debt with Life Cycle Motives."
American Economic Journal: Macroeconomics,
Intertemporal Household Choice; Life Cycle Models and Saving
Macroeconomics: Consumption; Saving; Wealth
Interest Rates: Determination, Term Structure, and Effects
Household Finance: Household Saving, Borrowing, Debt, and Wealth
National Debt; Debt Management; Sovereign Debt