Abstract
We study optimal policy in an economy where interest rates are low because public debt serves as collateral or buffer stock. Issuing more public debt raises welfare by easing the underlying friction but also reduces the private valuation of this service, raising interest rates. This trade-off shapes the optimal quantity of public debt in the long run, justifies a departure from tax smoothing in the short run, and calls for larger deficits during financial crises. Our analysis illustrates the possible robustness of these insights to different microfoundations and helps clarify when exactly low interest rates represent an opportunity for cheap government borrowing.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 3233-3264 |
| Number of pages | 32 |
| Journal | Journal of Political Economy |
| Volume | 131 |
| Issue number | 11 |
| DOIs | |
| State | Published - Nov 2023 |
Funding
stages of this project, Pedro Teles and Per Krusell for discussing our paper in conferences, numerous seminar participants for their comments, and last but certainly not least, Harald Uhlig and three anonymous referees for their extensive feedback. Angeletos also thanks the University of Bern, the Study Center Gerzensee, and the Swiss Finance Institute for their hospitality. Collard acknowledges funding from the Agence Nationale de la Recherche under grant ANR-17-EURE-0010 (Investissements d’Avenir program). This paper was edited by Harald Uhlig.
ASJC Scopus subject areas
- Economics and Econometrics
