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Article
Alternative Perspectives on Optimal Public Debt Adjustment
The B.E. Journal of Macroeconomics (2011)
  • Michal Horvath, University of Oxford
Abstract
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.
Keywords
  • optimal monetary and fiscal policy,
  • unconditionally optimal policy,
  • timeless perspective,
  • public debt dynamics,
  • second-order approximation
Publication Date
November 22, 2011
Citation Information
Michal Horvath. "Alternative Perspectives on Optimal Public Debt Adjustment" The B.E. Journal of Macroeconomics Vol. 11 Iss. 1 (2011)
Available at: http://works.bepress.com/michal_horvath/1/