Public Debt in Calibrated OLG Models: Fiscal Arithmetic versus Welfare Analysis
Abstract:
We analyze the fiscal and welfare implications of the size of public debt in stochastic OLG models with distortionary taxation. The government borrowing rate is realistically sensitive to debt issuance and lower than the growth rate. The risky rate is much higher due to convenience benefits of public debt, idiosyncratic return risk, and aggregate risk. Although free-lunch deficits can reduce tax distortions, we find that welfare-maximizing debt (WMD) is substantially lower than deficit-maximizing debt (DMD). Accounting for market power further reduces WMD yet barely changes DMD. When wealth inequality is included, the rich favor higher debt than the middle class.
About Johannes Brumm:
Johannes Brumm is a Professor of Macroeconomics at the Karlsruhe Institute of Technology (KIT). He has previously held (visiting) positions at the University of Zurich, Boston University, and Harvard University. In 2022, Johannes was awarded an ERC Starting Grant. His research covers various topics in macroeconomics, financial economics, and public finance. To address these questions, Johannes frequently employs and advances computational methods for global solutions of dynamic stochastic models. His work has been published in leading macroeconomic and general interest journals, including the Journal of Monetary Economics, AEJ: Macroeconomics, and Econometrica.
Language: English
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