Debt management strategy reduces inequality and shapes future wealth distribution.
The article explores how government debt management affects inequality in an economy. When public debt is low, using taxes instead of debt increases current inequality but reduces future inequality. The optimal policy balances this tradeoff by limiting public debt supply. As a result, policies respond persistently to spending shocks as households save more to protect against borrowing constraints. However, in the long run, households accumulate enough wealth to stabilize allocations and achieve Ricardian Equivalence.