Template-Type: ReDIF-Paper 1.0
Title: Can Public Debt Crowd in Private Investment?
Author-Name: Christian Bayer
Author-Email: christian.bayer@uni-bonn.de
Author-Name: Fabio Stohler
Author-Email: fabio.stohler@uni-bonn.de
Classification-JEL: D31, E21, G11, H63, O43
Keywords: Incomplete Markets, Public Debt, Endogenous Growth, Portfolio Choice

Abstract: 
If households self‐select into a risky high‐income state through investment, increased
government debt can stimulate investment and improve welfare. In a heterogeneous agent
endogenous growth model, government debt helps households smooth consumption and
encourages investment in risky, high‐return assets, crowding in aggregate growth. However,
when debt becomes excessive, capital crowding out and distortionary taxation negate these
benefits. Using a model calibrated to U.S. data, we show that this crowding‐in effect suggests a
higher optimal debt‐to‐GDP ratio than currently observed.

Note: 
Length: 59
Creation-Date: 2025-06
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp691
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_691