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  • Audrey Desbonnet (a1) and Sumudu Kankanamge (a2)

In this paper, we investigate the importance of aggregate fluctuations for the assessment of the optimal level of public debt in an incomplete-markets economy. We start by building a steady state model in which households are only subject to uninsurable idiosyncratic risk and evaluate the optimal level of public debt. We then augment the model to allow for aggregate risk and measure the impact on the optimal level. We show that the cyclical behavior of the economy has a quantitative impact on this level that can be decomposed into the effects of the aggregate productivity shock and the cyclicality of unemployment. Moreover, we find that matching wealth distribution statistics substantially changes the optimal level of public debt.

Corresponding author
Address correspondence to: Sumudu Kankanamge, Toulouse School of Economics, GREMAQ–Manufacture des Tabacs, 21, allée de Brienne, 31000 Toulouse, France; e-mail:
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The authors wish to thank Yann Algan, Antoine d'Autume, Fabrice Collard, Wouter Den Haan, Jean-Olivier Hairault, Michel Juillard, Pierre Malgrange, Franck Portier, Gianluca Violante, Thomas Weitzenblum, the editor, William A. Barnett, the associate editor, and two anonymous referees for their helpful comments.

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Macroeconomic Dynamics
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  • EISSN: 1469-8056
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