Optimal macroeconomic stabilisation

In a recession, risk premia on private-sector bonds rise far more than on government bonds. This means that during recessions, it is optimal to stimulate the economy (to smooth consumption) via public borrowing and not via private borrowing, as the subsequent cost of the debt is lower if it is public. Conversely, private debt can be substituted for public debt during expansion periods. In countries that practice this optimal stabilisation, we should therefore see opposing trends in public and private debt in all periods. This is the case in the United States, the United Kingdom, Spain, Italy and Japan, but not in Germany or France. Since the subprime crisis, debt ratios have fallen In Germany, while they have risen in tandem in France.