Public Debt and Private Savings: How Important are (Endogenous) Borrowing Limits?∗

We use an incomplete markets model with borrowing constraints in which households are subject to idiosyncratic productivity shocks to measure the long-run impact of government debt on house-hold savings. We generate borrowing constraints endogenously by assuming limited commitment on the side of debtors. The model is calibrated such that the wealth distribution is consistent with the fraction of the U.S. population that is in debt or holds very little wealth. The implied borrowing limits are negative. We show that this has substantial impact on the crowding out of private capital by public debt: imposing an ad-hoc borrowing limit of zero, as it is commonly done in the literature, overestimates the effect of debt by 20 %