Public Debt as Private Liquidity: Optimal Policy

George-Marios Angeletos, Fabrice Collard, Harris Dellas

NBER Working Paper No. 22794
Issued in November 2016
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics, Public Economics

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.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22794

Users who downloaded this paper also downloaded* these:
Cochrane w22485 Macro-Finance
Leeper w22800 Should Central Banks Care About Fiscal Rules?
Angeletos, Collard, Dellas, and Diba w18800 Optimal Public Debt Management and Liquidity Provision
Hilger w22748 Upward Mobility and Discrimination: The Case of Asian Americans
Daniel, Litterman, and Wagner w22795 Applying Asset Pricing Theory to Calibrate the Price of Climate Risk
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us