The Optimal Quantity of the United States Government Debt

Student: Podaneva Alena

Educational Programme: Financial Engineering (Master)

Final Grade: 8

Year of Graduation: 2019

The optimum quantity of the United States fiscal debt is always a hot question in macroeconomics and contemporary policy. Using a continuous time heterogeneous-agent model, this thesis describes the asymptotic distribution of wealth and its welfare implications at the overall economy level. In order to solve the dynamic wealth-accumulation model, I employ a finite-differences approach, with dynamic optimization using an implicit method. I introduce fiscal debt as a way to deal with market incompleteness that results from borrowing constraints. Fiscal debt is a way to relax borrowing constraints and this redistributive effect contributes to an insurance effect that increases welfare. Yet, since debt is financed using marginal taxes, there is also a distortionary effect, decreasing welfare. My thesis examines this trade-off and lands a calibrated version of the model that indicates a moderate level of wealth as second-best optimal.

Full text (added November 14, 2019)

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