Rankin, Neil and Roffia, Barbara (1999) Maximum sustainable government debt in the overlapping generations model. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers.

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Abstract

The theoretical determinants of maximum sustainable government debt are investigated using Diamond’s overlapping-generations model. A level of debt is defined to be ‘sustainable’ if a steady state with non-degenerate values of economic variables exists. We show that a maximum sustainable level of debt almost always exists. Most interestingly, it normally occurs at a ‘catastrophe’ rather than a ‘degeneracy’, i.e. where variables such as capital and consumption are in the interiors, rather than at the limits, of their economically meaningful ranges. This means that if debt is increased step by step, the economy may suddenly collapse without obvious warning.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HJ Public Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Debts, Public, Intergenerational relations, Distributive justice, Catastrophes (Mathematics)
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	January 1999
Number:	No.521
Number of Pages:	29
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	Aghion, P. and Bolton, P. (1990) "Government Debt and Risk of Default: A Political-Economic Model of the Strategic Role of Debt", in Dornbusch, R. and Draghi, M. (eds.), Public Debt Management: Theory and Practice, Cambridge: Cambridge University Press Auerbach, A.J. and Kotlikoff, L.J. (1987) Dynamic Fiscal Policy, Cambridge: Cambridge University Press Auerbach, A.J., Gokhale, J. and Kotlikoff, L.J. (1991) “Generational Accounts: A Meaningful Alternative to Deficit Accounting”, in Bradford, D.F. (ed.), Tax Policy and the Economy, vol. 5, Cambridge, MA: MIT Press Azariadis, C. (1993) Intertemporal Macroeconomics, Oxford: Blackwell Azariadis, C. and Reichlin, P. (1996) "Increasing Returns and Crowding Out", Journal of Economic Dynamics and Control 20, 847-877 Blanchard, O.J., Chouraqui, J.C., Hagemann, R.P. and Sartor, N. (1990) "The Sustainability of Fiscal Policy: New Answers to an Old Question", OECD Economic Studies 15, 7-36 Calvo, G.A. (1988) “Servicing the Public Debt: The Role of Expectations”, American Economic Review 78, 647-661 Carlberg, M. (1995) Sustainability and Optimality of Public Debt, Physica Verlag, Hamburg Christ, C. (1979) "On Fiscal and Monetary Policies and the Government Budget Restraint", American Economic Review 69, 526-538 Diamond, P.A. (1965) "National Debt in a Neoclassical Growth Model", American Economic Review 55, 1126-1150 Kotlikoff, L.J. (1993) “From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy”, Journal of Economics 7, Supp., pp. 17-41 Masson, P.R. (1985) "The Sustainability of Fiscal Deficits", IMF Staff Papers 32, 577-605 Nielsen, S.B. (1992) "A Note on the Sustainability of Primary Budget Deficits", Economics Letters 14, 745-754 Pereira, F.M. (1998) Maximum Sustainable Government Debt in an Open-Economy Overlapping Generations Model, MSc dissertation, University of Warwick Roffia, B. (1996) The Sustainability of Government Financial Policies in Overlapping Generations Models, PhD thesis, University of Warwick
URI:	http://wrap.warwick.ac.uk/id/eprint/1653

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