In this paper, we quantitatively analyze to what extent a benevolent government should issue debt in a model where households are subject to idiosyncratic productivity shocks, insurance markets are missing and borrowing is restricted. In this environment, issuing government bonds facilitates...

We calibrate an incomplete markets large scale OLG model to the US income and wealth distribution and examine the effects of alternative government debt levels and adjustment policies on macroeconomic aggregates and welfare. We find that the government should hold negative debt. Due to the high...

To what extent is public debt private liquidity? Much policy advice given in the aftermath of the financial crisis rests on the assumption that increasing public debt relaxes borrowing constraints of private households. This is the case for ad-hoc debt limits, which are exogenous to public...

Many researchers have recommended to increase public debt in the aftermath of the financial crisis in order to relax borrowing constraints for private households. This advice is based on the common assumption that borrowing conditions of private agents are exogenous to public policy. We study...

In this paper we study the quantitative properties of alternative social security regimes in a large overlapping generations model where households face uninsurable idiosyncratic income shocks. We study this issue in two model economies. The first is the standard one characterized by exogenous...

We study the effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the...

Financing government spending through lump sum taxes does not distort capital when markets are complete but tends to increase precautionary savings under market incompleteness. Using flat consumption taxes instead leaves precautionary savings unaffected, provided certain conditions on utility...

Aiyagari (1995) showed that long-run optimal fiscal policy features a positive tax rate on capital income in Bewley-type economies with heterogeneous agents and incomplete markets. However, determining the magnitude of the optimal capital income tax rate was considered to be prohibitively...

Government bonds are interest-bearing assets. Increasing public debt increases income, wealth, and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher...

Government bonds are interest-bearing assets. Increasing public debt increases income, wealth, and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher...