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Optimal Level of Government Debt
Report

Optimal Level of Government Debt

Matching Wealth Inequality and the Financial Sector

Edgar Vogel
ECB, 2014
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Editorial Rating

7

Qualities

  • Innovative

Recommendation

Debate over the impact of government debt on an economy continues in the wake of the Great Recession. Public-sector borrowing can fund fiscal expansions that are designed to drive consumption and growth, but that debt also can dampen private-sector investment and harm growth in the long run. Economist Edgar Vogel of the European Central Bank makes an important new contribution to the research on ideal sovereign debt levels. getAbstract recommends his report, despite its rather dense and theoretical delivery, for its realistic modeling of the effects of government debt on economic welfare.

Take-Aways

  • Research using complex models shows that the ideal level of government debt for an economy ranges from -110% to -180% of GDP.
  • Lower government debt – that is, a greater accumulation of state assets – would reduce interest rates, increase capital investment and raise wages across an economy.
  • Lower interest rates would reduce the returns from capital, hurting the wealthiest citizens. The poorest gain under more modest levels of state asset accumulation, since rising wages and greater transfers combine to improve their welfare.

About the Author

Edgar Vogel is an economist at the European Central Bank.

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