Public debt in economies with heterogeneous agents

Anmol Bhandari, David Evans, Mikhail Golosov, Thomas J. Sargent

Research output: Contribution to journalArticle

Abstract

We study public debt in competitive equilibria in which a government chooses transfers and taxes optimally and in addition decides how thoroughly to enforce debt contracts. If the government enforces perfectly, asset inequality is determined in an optimum competitive equilibrium but the level of government debt is not. Welfare increases if private debt contracts are not enforced. Borrowing frictions let the government gather monopoly rents that come from issuing public debt without facing competing private borrowers. Regardless of whether the government chooses to enforce private debt contracts, the level of initial government debt does not affect an optimal allocation.

Original languageEnglish (US)
Pages (from-to)39-51
Number of pages13
JournalJournal of Monetary Economics
Volume91
DOIs
StatePublished - Nov 2017

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Keywords

  • Distorting tax
  • Government debt
  • Ricardian equivalence
  • Transfers

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