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The Optimum Structure for Government Debt

Author

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  • Kuhle, Wolfgang

    (Munich Center for the Economics of Aging (MEA))

Abstract

This paper studies the structural differences between implicit and explicit government debt in a two-generations-overlapping model with stochastic factor-prices. If a government can issue safe bonds and new claims to wage-indexed social security to service a given initial obligation, there exists a set of Pareto-efficient ways to do so. This set is characterized by the conflicting interests of the current young and the yet unborn generations regarding the allocation of factor-price risks. However, it is shown that there will always exist a simple intertemporal compensation mechanism which allows to reconcile these conflicting interests. This compensation mechanism narrows the set of Pareto-efficient debt structures until only one remains. This result hinges on the double-incomplete markets structure of stochastic OLG models where households can neither trade consumption loans nor factor-price risks privately.

Suggested Citation

  • Kuhle, Wolfgang, 2010. "The Optimum Structure for Government Debt," MEA discussion paper series 09194, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    • Handle: RePEc:mea:meawpa:09194
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    Cited by:

    1. Marcin Bielecki & Krzysztof Makarski & Joanna Tyrowicz & Marcin Waniek, 2015. "In the search for the optimal path to establish a funded pension system," Working Papers 2015-22, Faculty of Economic Sciences, University of Warsaw.
    2. Jan Hagemejer & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Efficiency of the pension reform: the welfare effects of various fiscal closures," Working Papers 2013-23, Faculty of Economic Sciences, University of Warsaw.
    3. Makarski, Krzysztof & Tyrowicz, Joanna & Komada, Oliwia, 2021. "Efficiency versus Insurance: Capital Income Taxation and Privatizing Social Security," IZA Discussion Papers 14805, Institute of Labor Economics (IZA).

    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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