The Sustainability and Optimality of Government Debt

Abstract

The sustainability and optimality rules for government debt are derived within an intertemporal optimizing framework in which both capital and government debt are endogenous, driven by utility and profit-maximizing behavior of private agents and tax and expenditure policies of the government. The rules are expressed purely in terms of familiar economic parameters, and their ready applicability in an operational context is illustrated by instructive numerical examples. A discussion of the relationship between the optimality rule and the "golden rule" of savings in the literature is also provided.