Maximum sustainable government debt in the overlapping generations model
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 (No.521).
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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|
|Official Date:||January 1999|
|Number of Pages:||29|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
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
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