A very interesting paper by Matias Bayas-Erazo, “Optimal Public Debt with Redistribution”, was presented today at the NBER Summer Institute’s Inequality and Macroeconomics workshop. Video on youtube.
The paper jointly studies the optimal degree of tax progressivity and the optimal supply of public debt in a standard heterogeneous-agent incomplete-markets economy. It solves the fully dynamic Ramsey problem, including both the optimal long-run policy and the transition toward it. This is a technically demanding problem; interested readers can find the computational and theoretical details in the paper.
For students and researchers interested in experimenting with the simpler steady-state version of the model used in the paper, the following VFI Toolkit examples provide useful starting points:
The first illustrates how to solve a standard stationary Aiyagari economy in general equilibrium. The second is particularly relevant because it features government bonds and endogenous labor supply.
These examples could be adapted relatively easily to construct a steady-state version of the paper’s benchmark model: a Huggett-style economy in which government bonds are the only asset, households face idiosyncratic productivity risk and choose labor supply, and labor income is subject to a constant-rate-of-progressivity tax schedule of the type used by Bénabou and Heathcote, Storesletten, and Violante.