Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-24T13:03:27.156Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON OPTIMAL DEBT REDUCTION POLICIES

Published online by Cambridge University Press:  21 February 2019

Davide la Torre  and
Simone Marsiglio
Davide la Torre*
Affiliation:
University of Dubai and University of Milan
Simone Marsiglio
Affiliation:
University of Pisa
*
Address correspondence to: Davide La Torre, Dubai Business School, University of Dubai, Academic City, Dubai 14143, UAE and Department of Economics, Management, and Quantitative Methods, University of Milan, via Conservatorio 7, Milan 20122, Italy. e-mails: [email protected]; [email protected]. Phone: +97145566927.
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze the optimal debt reduction problem in an uncertainty context. The social planner has a finite horizon and seeks to minimize the social costs associated with debt repayment by taking into account not only the short-run costs of the policy, but also the long-run costs associated with the outstanding level of debt. We characterize the optimal policy and the dynamics of the debt-to-GDP ratio, showing that it will decrease over time if economic policy is effective enough. We characterize how the evolution of the debt-to-GDP ratio depends on the main parameters and we present a simple calibration based on Greek data to illustrate the implications of our analysis in real-world setups.

Keywords

Debt ReductionOptimal PolicyUncertainty
Type
Notes
Information
Macroeconomic Dynamics , Volume 24 , Issue 7 , October 2020 , pp. 1850 - 1860
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are indebted to two anonymous referees and the associate editor for their constructive comments which helped us to substantially improve our paper. All errors and omissions are our own sole responsibility.

References

Barro, R. J. (1979) On the determination of the public debt. Journal of Political Economy 87, 940–971.CrossRefGoogle Scholar
Barro, R. J. and Sala-i-Martin, X. (2004) Economic Growth. Cambridge, Massachusetts: MIT Press.Google Scholar
Futagami, K., Iwaisako, T. and Ohdoi, R. (2008) Debt policy rules, productive government spending, and multiple growth paths. Macroeconomic Dynamics 12, 445–462.CrossRefGoogle Scholar
Greiner, A. (2011) Economic growth, public debt and welfare: Comparing three budgetary rules. German Economic Review 12, 205–222.CrossRefGoogle Scholar
Greiner, A. (2012) Public capital, sustainable debt and endogenous growth. Research in Economics 66, 230–238.CrossRefGoogle Scholar
Greiner, A. and Fincke, B. (2009) Public Debt and Economic Growth. Berlin: Springer Verlag.CrossRefGoogle Scholar
La Torre, D., Liuzzi, D. and Marsiglio, S. (2017) Pollution control under uncertainty and sustainability concern. Environmental and Resource Economics 67, 885–903.CrossRefGoogle Scholar
Lane, P. R. (2012) The European sovereign debt crisis. Journal of Economic Perspectives 26, 49–68.CrossRefGoogle Scholar
Maebayashi, N., Hori, T. and Futagami, K. (2017) Dynamic analysis of reductions in public debt in an endogenous growth model with public capital. Macroeconomic Dynamics 21, 1454–1483.CrossRefGoogle Scholar
Papageorgiou, D. (2012) Fiscal policy reforms in general equilibrium: The case of Greece. Journal of Macroeconomics 34, 504–522.CrossRefGoogle Scholar
Ramsey, F. (1928) A mathematical theory of saving. Economic Journal 38, 543–559.CrossRefGoogle Scholar