Public Debt and the Balance Sheet of the Private Sector

Abstract

This paper studies the impact of corporate political influence on fiscal policy. We in-troduce different interest groups, firms and households, into a simple growth model with incomplete markets and heterogeneous agents. Firms face non-insurable id-iosyncratic productivity shocks. They finance their productive investments by issu-ing bonds but cannot issue equity. Households’ savings are invested into corporate bonds and public debt. The government selects the levels of taxes and public debt so as to maximize a weighted sum of the welfares of firms’owners and households. More government debt reduces corporate leverage, increases the risk free rate r and decreases the growth rate g. A. The weight of firms in social welfare determines whether r < g or r > g at the optimum, with different dynamics in both regimes.

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Reference

Hans Gersbach, Jean-Charles Rochet, and Ernst-Ludwig von Thadden, “Public Debt and the Balance Sheet of the Private Sector”, TSE Working Paper, n. 23-1412, February 2023.