This book studies the sustainability and optimality of public debt under
different scenarios: the closed economy, the small open economy, and a
two-country setting. Sustainability refers to the existence and the
stability of the long-run equilibrium. Optimality relates to the path of
public debt that maximizes discounted utility. The analysis is conducted
within the framework of the Solow model, the overlapping generations
model and the infinite horizon model. The government can follow
different strategies, it either fixes the deficit ratio or the tax rate.
As a result, a fixed deficit ratio generally can be sustained. By
contrast, a fixed tax rate generally cannot be sustained. Depending on
the chosen fiscal strategy, there exists either an optimal deficit ratio
or an optimal tax rate that maximizes the sum of consumption and
government purchases per capita.