Government Debt, Public Capital, and Public goods in RBC model

General DSGE Modeling
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Hi everyone,

I’m currently working on incorporating government debt, public capital, and government goods into my DSGE model, and I have a few questions I’d appreciate some guidance on.

  1. Household Bond Holdings in a Closed Economy:
  • In a closed economy, should I allow households to purchase government bonds as a means of financing public debt?
  • If so, I assume this means bonds will appear in both the households’ budget constraint and the government’s budget constraint. Is this the correct approach?
  1. Introducing Public Capital into the Production Function:
  • I want to include public capital in the firm’s production function. Specifically, I’m considering a function where output depends on private capital, labor, and public capital. The idea is that firms can utilize public capital at no cost.
  1. Government Goods in Household Utility:
  • I intend to introduce government goods into the household utility function, treating them as imperfect substitutes for private consumption by modeling aggregate consumption as a CES function between private and public consumption.
  • In this case, government goods would influence the household’s optimal consumption decisions. Does this approach seem appropriate for capturing the trade-off between private and public consumption in the utility function?

My ultimate goal is to analyze how shocks to public investment and the provision of public goods affect the overall economy. I’d greatly appreciate any feedback or suggestions on this setup.

Thank you!

1 Like
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  1. Yes, at least if the agents are optimizing. If you have rule-of-thumb consumers, they may not have access to bonds. And yes, if Ricardian equivalence does not hold then the bonds will appear in the two budget constraints as well as potentially in fiscal rules.
  2. Yes, having non-separable utility can and has been done before.
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Thank you for your answer!