Topic: A p Theory of Government Debt and Taxes

Speaker: Neng Wang, Chong Khoon Lin Professor of Real Estate and Professor of Finance, Columbia Business School, Columbia University

Time: 10:00am-11:30am, September 27 (Beijing Time)

Location: 4-101

Abstract:

An optimal tax and borrowing plan determines the marginal cost of servicing government debt, p’, and makes the government’s debt risk-free. An option to default restricts debt capacity. Optimal debt-GDP ratio dynamics are driven by 1) a primary deficit, 2) interest (netting convenience yield) payments, 3) GDP growth, and 4) hedging costs. Hedging influences debt capacity and debt transition dynamics. For plausible parameter values, we make comparative dynamic quantitative statements about debt-GDP ratio transition dynamics, debt capacity, and how long it would take our example economy to attain that calibrated equilibrium debt capacity.