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The Optimal Structure for Public Debt
Author(s) -
Kuhle Wolfgang
Publication year - 2014
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12044
Subject(s) - debt , economics , obligation , set (abstract data type) , debt service coverage ratio , monetary economics , crowding out , internal debt , bond , microeconomics , external debt , macroeconomics , finance , computer science , political science , law , programming language
We study risk‐sharing through public debt in a two‐generations‐overlapping model. If bonds and wage‐indexed social security service a given initial obligation, there exists a set of P areto‐efficient debt structures. This set is characterized by conflicting interests of current and yet unborn cohorts over the factor‐price risk allocation. If both size and composition of the debt are choice variables, these conflicting interests can be reconciled. Changes in the debt's composition reallocate factor‐price risks, while changes in its size reallocate resources. This separation of risk‐sharing and crowding‐out narrows the set of efficient debt structures until only one remains.