Optimal public debt under demographic changes in China

Abstract

ABSTRACT In this paper, we use an overlapping-generations model to estimate the optimal public debt level in terms of the growth-maximizing theory under changing demographics and examine the fiscal sustainability in China. The results suggest that the optimal level of public debt in China lies in a scope of 70% to 88%, which varies as a function of the driving force of the production, the number of children, and the subsidy policy for rearing the children. On the basis of fiscal space framework, we can conclude that China’s public debt and thereby the fiscal position is sustainable in the near and medium terms. Sensitivity analyses and robustness tests also support our empirical findings. Our study provides insights into public debt management, population policy, and strategies for economic growth in China.