Abstract: What are the limits on how much a government can borrow when the real interest rate on public debt is below the growth rate of the economy? I explore this question using a standard model of risky investment under incomplete markets, extended to feature emerging market (EM) economies with even greater risk, and limits to the private supply of safe assets. These two elements further inflate the bubble in public debt, affording developed market (DM) governments even greater fiscal space.

Abstract: When governments provide services to the public that are free at the point of use, like higher education in many European countries, they must balance the adequate provision of services against the economic costs of funding them with distortionary taxes like progressive income taxes. Should governments always provide adequate funding and accept the higher taxes, or should they allow for rationing of places in order to limit these distortions? I develop a macroeconomic model where higher education is funded by the government and rationing of places is possible. I show that in the calibrated model the optimal policy is to provide just enough funding to avoid rationing, even when taxes are highly progressive and hence more distorting. Moreover, general labour taxes should be highly progressive, while graduate taxes should be near zero.