On the (De)Stabilizing Effect of Public Debt in a Ramsey Model with Heterogeneous Agents

Kazuo Nishimura (1, 2) , Carine Nourry (3, 4) , Thomas Seegmuller (3) , Alain Venditti (3, 5)

1 RIEB, Kobe University
2 KIER, Kyoto University
3 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
4 IUF - Institut universitaire de France
5 EDHEC Business School

We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality affecting utility which is financed by income tax and public debt. We show that public debt considered as a fixed portion of GDP can have a stabilizing or destabilizing effect 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 fluctuations. 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 fluctuations without debt.

Mots clés: public debt; borrowing constraint; endogenous cycles; heterogeneous agents; public spending

Domaines: Economies et finances

Kazuo Nishimura, Carine Nourry, Thomas Seegmuller, Alain Venditti. On the (De)Stabilizing Effect of Public Debt in a Ramsey Model with Heterogeneous Agents. 2014. ⟨halshs-01059567⟩