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Bank of Finland, Rauhankatu 19 B, Helsinki
Fabrice Collard (University of Bern): Public debt as private liquidity: optimal policy
Co-authors: George-Marios Angeletos and Harris Dellas
Abstract
We study the Ramsey policy problem in an economy in which public debt contributes to the supply of assets that private agents can use as buffer stock and collateral, or as a vehicle of liquidity. Issuing more debt eases the underlying financial friction. This raises welfare by improving the allocation of resources; but it also tightens the government budget by raising the interest rate on public debt. In contrast to the literature on the Friedman rule, the government’s supply of liquidity becomes intertwined with its debt policy. In contrast to the standard Ramsey paradigm, a departure from tax smoothing becomes desirable. Novel insights emerge about the optimal long-run quantity of public debt; the optimal policy response to shocks; and the sense in which a financial crisis presents the government with an opportunity for cheap borrowing.
Research seminars organised by the Bank of Finland's research unit are held on Thursdays at 10:30–11:45 in Rauhankatu 19, 3rd floor big meeting room (unless indicated otherwise). Seminars are held in English.
Research seminars are open to all economists (unless indicated otherwise). Please register in advance at research(at)bof.fi by noon of the preceding day. Visitors will be escorted from Rauhankatu 19 B (Kirjasto/Library) entrance to the seminar room 10 minutes before the seminar.