Alternative Perspectives on Optimal Public Debt Adjustment

We compare alternative optimal public debt adjustment strategies in a New Keynesian economy. We find that the unconditionally optimal policy is consistent with a gradual adjustment in public debt towards its mean value at a speed determined by the rate of time preference of agents. To a second-order approximation in a stochastic setting, debt follows a unit root process with a negative drift under the 'timeless-perspective' approach but converges to an unconditional mean different from the non-stochastic steady state in the unconditionally optimal economy. Overall, increases in public debt are shown to be optimally reduced by half only after approximately two decades at best.