Data and Code for: Optimal Public Debt with Life Cycle Motives

Principal Investigator(s): View help for Principal Investigator(s) William Peterman, Federal Reserve Board; Erick Sager, Federal Reserve Board

Version: View help for Version V1

Name	File Type	Size	Last Modified
computation			06/02/2021 01:10:AM
exhibits			06/02/2021 01:14:AM
readme.pdf	application/pdf	172.7 KB	08/31/2021 06:30:AM
readme.txt	text/plain	13.3 KB	08/31/2021 06:31:AM

Project Citation:

Peterman, William, and Sager, Erick. Data and Code for: Optimal Public Debt with Life Cycle Motives. Nashville, TN: American Economic Association [publisher], 2022. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2022-09-28. https://doi.org/10.3886/E141661V1

Project Description

Summary: 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, both in the cross section of U.S. households and by age. We find that public savings, not public debt, equal to 168% 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 slows the empirically observed rate of consumption and leisure growth over an average household's lifetime, and the resulting flatter allocation of lifetime consumption and leisure improves welfare. We show that when including the life cycle these welfare benefits are large; so large that, on net, they outweigh the transitional costs from a tax-financed public debt elimination.

Scope of Project

JEL Classification:
      E21 Macroeconomics: Consumption; Saving; Wealth
      E62 Fiscal Policy
      H60 National Budget, Deficit, and Debt: General

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Published Versions

V1 [2022-09-28]

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