Iranian Economic Review

Iranian Economic Review

Optimum Public Debt in Iran: An Emphasis on The Precautionary Savings Model

Document Type : Research Paper

Authors
Ensieh Mosaddeghi 1
rasoul Bakhshi Dastjerdi 2
Seyyed Aqil Hoseiny 3
1 Department of Economics, University of Isfahan, Isfahan, Iran.
2 Department of Economics, University of Isfahan, Isfahan, Iran
3 Department of Economics, Yasouj University, Yasouj, Iran
10.22059/ier.2024.362274.1007855
Abstract
This study examines the effects of the government debt-to-GDP ratio on welfare in the Iranian economy. Because of limited access to loans in Iran, the analysis employs an incomplete-markets model based on Aiyagari’s heterogeneous-agent framework. In addition to idiosyncratic wage risk, households face both budget and borrowing constraints. Given that the Iran’s economy faces both high inflation and borrowing constraints, Iranian households prefer to hold assets such as gold, land, and term deposits, besides government debt and physical capital, for precautionary savings purposes. Therefore, this study incorporates the above-mentioned assets in the model. The model is solved numerically using the finite element method (FEM). The results show that the optimal quantity of debt is significantly negative according to the welfare criteria, and the welfare gain from moving to the optimum is 2.66% of per capita consumption, which is not negligible. As a result, the negative role that debt plays in the model (crowding out private capital) is more than the positive role of enhancing liquidity, and private sector spending should replace government spending. It is optimal for the government to accumulate assets in the long run so that all government expenditures are financed by the interest income earned on private assets. Furthermore, if excessive holding of assets is restricted through policies such as imposing taxes on holding assets and developing financial markets, the welfare loss of maintaining the current level of debt instead of the optimal quantity will decrease.
Keywords
finite element method
government debt
heterogeneous agent models
incomplete markets
precautionary saving
self-insurance
Subjects
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Iranian Economic Review
Volume 30, Issue 2
Spring 2026
Pages 636-663