Optimal Public Debt Management and Liquidity Provision
We study the Ramsey policy problem in an economy in which firms face a collateral constraint. Issuing more public debt alleviates this friction by increasing the aggregate quantity of collateral. In so doing, however, the issuance of more debt also raises interest rates, which in turn increases the...
| Main Authors: | , , , |
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| Format: | Working Paper |
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Cambridge, MA: Department of Economics, Massachusetts Institute of Technology
2013
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| Subjects: | |
| Online Access: | http://hdl.handle.net/1721.1/76742 |
| _version_ | 1811094841656868864 |
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| author | Angeletos, George-Marios Collard, Fabrice Dellas, Harris Diba, Behzad |
| author_facet | Angeletos, George-Marios Collard, Fabrice Dellas, Harris Diba, Behzad |
| author_sort | Angeletos, George-Marios |
| collection | MIT |
| description | We study the Ramsey policy problem in an economy in which firms face a collateral constraint. Issuing more public debt alleviates this friction by increasing the aggregate quantity of collateral. In so doing, however, the issuance of more debt also raises interest rates, which in turn increases the tax burden of servicing the entire outstanding debt. We first document how this trade-off upsets the optimality of tax smoothing and, in contrast to the standard paradigm, helps induce a unique and stable steady-state level of debt in the deterministic version of the model. We next study the optimal policy response to fiscal and financial shocks in the stochastic version. We finally show how the results extend to a variant model in which the financial friction afflicts consumers rather than firms. |
| first_indexed | 2024-09-23T16:05:42Z |
| format | Working Paper |
| id | mit-1721.1/76742 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T16:05:42Z |
| publishDate | 2013 |
| publisher | Cambridge, MA: Department of Economics, Massachusetts Institute of Technology |
| record_format | dspace |
| spelling | mit-1721.1/767422019-04-12T21:33:25Z Optimal Public Debt Management and Liquidity Provision Angeletos, George-Marios Collard, Fabrice Dellas, Harris Diba, Behzad public debt liquidity optimal fiscal policy Ramsey Friedman rule financial frictions We study the Ramsey policy problem in an economy in which firms face a collateral constraint. Issuing more public debt alleviates this friction by increasing the aggregate quantity of collateral. In so doing, however, the issuance of more debt also raises interest rates, which in turn increases the tax burden of servicing the entire outstanding debt. We first document how this trade-off upsets the optimality of tax smoothing and, in contrast to the standard paradigm, helps induce a unique and stable steady-state level of debt in the deterministic version of the model. We next study the optimal policy response to fiscal and financial shocks in the stochastic version. We finally show how the results extend to a variant model in which the financial friction afflicts consumers rather than firms. 2013-02-06T02:00:17Z 2013-02-06T02:00:17Z 2013-02-05 Working Paper http://hdl.handle.net/1721.1/76742 Working Paper, Massachusetts Institute of Technology, Dept. of Economics;13-02 An error occurred on the license name. An error occurred getting the license - uri. application/pdf Cambridge, MA: Department of Economics, Massachusetts Institute of Technology |
| spellingShingle | public debt liquidity optimal fiscal policy Ramsey Friedman rule financial frictions Angeletos, George-Marios Collard, Fabrice Dellas, Harris Diba, Behzad Optimal Public Debt Management and Liquidity Provision |
| title | Optimal Public Debt Management and Liquidity Provision |
| title_full | Optimal Public Debt Management and Liquidity Provision |
| title_fullStr | Optimal Public Debt Management and Liquidity Provision |
| title_full_unstemmed | Optimal Public Debt Management and Liquidity Provision |
| title_short | Optimal Public Debt Management and Liquidity Provision |
| title_sort | optimal public debt management and liquidity provision |
| topic | public debt liquidity optimal fiscal policy Ramsey Friedman rule financial frictions |
| url | http://hdl.handle.net/1721.1/76742 |
| work_keys_str_mv | AT angeletosgeorgemarios optimalpublicdebtmanagementandliquidityprovision AT collardfabrice optimalpublicdebtmanagementandliquidityprovision AT dellasharris optimalpublicdebtmanagementandliquidityprovision AT dibabehzad optimalpublicdebtmanagementandliquidityprovision |