RIEB, Kobe University

On the (de)Stabilizing Effect of Public Debt In a Ramsey Model with Heterogeneous Agents

We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality aecting utility which is nanced by income tax and public debt. We show that public debt considered as a xed portion of GDP can have a stabilizing or destabilizing eect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic uctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent uctuations without debt.