A NOTE ON OPTIMAL DEBT REDUCTION POLICIES. (21st October 2020)

• Record Type: Journal Article
• Authors: la Torre, Davide; Marsiglio, Simone
• Is Part Of: Macroeconomic dynamics. Volume 24:Number 7(2020)
• Page Start: 1850
• Page End: 1860
• Publication Date: 2020-10-21
• Subjects: Debt Reduction, -- Optimal Policy, -- Uncertainty; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100519000014
• Languages: English
• ISSNs: 1365-1005

Abstract

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.