This paper studies the optimal ratio of government debt based on theheterogeneous agents model. The optimal ratio is determined where themarginal benefit is equal to the marginal cost. The benefit of increasinggovernment debt is the consumption smoothing through loosening theborrowing constraints of households, but the cost is that government debtcrowds out private capital and raises the interest rate. This paper shows thatthere is an hump-shaped relationship between the government debt ratio andsocial welfare. It also finds that one percentage point increase in governmentdebt ratio induces interest rate to increase by 1.02 basis points, but the effectis larger as the debt ratio increases.