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Maximum Sustainable Government Debt in the Overlapping Generations Model

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  • Neil Rankin

    (University of Warwick)

  • Barbara Roffia

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, and it normally occurs where variables such as capital are in the interiors, rather than at the limits, of their economically feasible ranges. This leads to a situation where, when debt is at its maximum, a further infinitesimal increase in debt causes a 'catastrophe', i.e. the economy embarks on a path of unchecked capital decumulation. Copyright 2003 Blackwell Publishing Ltd and The Victoria University of Manchester.

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School.

Volume (Year): 71 (2003)
Issue (Month): 3 (06)
Pages: 217-241

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Handle: RePEc:bla:manchs:v:71:y:2003:i:3:p:217-241

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Cited by:
  1. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, Elsevier, vol. 29(4), pages 708-723, December.
  2. Giovanni Ganelli, 2002. "Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour Supply," Trinity Economics Papers, Trinity College Dublin, Department of Economics 200215, Trinity College Dublin, Department of Economics.
  3. Real Arai, 2011. "Productive Government Expenditure and Fiscal Sustainability," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 67(4), pages 327-351, December.
  4. Puhakka , Mikko, 2005. "The effects of aging population on the sustainability of fiscal policy," Research Discussion Papers, Bank of Finland 26/2005, Bank of Finland.
  5. Rafal Benecki & Jens Hölscher & Mariusz Jarmuzek, 2006. "Fiscal Transparency And Policy Rules In Poland," Working Papers, CENTRE FOR THE STUDY OF ECONOMIC AND SOCIAL CHANGE IN EUROPE,School of Slavonic and East European Studies,University College London (SSEES,UCL) 65, CENTRE FOR THE STUDY OF ECONOMIC AND SOCIAL CHANGE IN EUROPE,School of Slavonic and East European Studies,University College London (SSEES,UCL).
  6. Annicchiarico, Barbara & Giammarioli, Nicola, 2004. "Fiscal rules and sustainability of public finances in an endogenous growth model," Working Paper Series, European Central Bank 0381, European Central Bank.
  7. Fernández-Huertas Moraga, Jesús & Vidal, Jean-Pierre, 2004. "Fiscal sustainability and public debt in an endogenous growth model," Working Paper Series, European Central Bank 0395, European Central Bank.
  8. Karl Farmer, 2011. "Public-Debt Sustainability, Real Exchange Rate, and Country-Specific Saving Rates," International Advances in Economic Research, Springer, Springer, vol. 17(1), pages 45-65, February.
  9. Karl Farmer & Matthias Schelnast, 2013. "Public Debt Reduction in Advanced Countries and Its Impact on Emerging Countries," International Advances in Economic Research, Springer, Springer, vol. 19(2), pages 167-188, May.
  10. Karl Farmer & Jacopo Zotti, 2010. "Sustainable government debt in a two-good, two-country overlapping generations model," International Review of Economics, Springer, Springer, vol. 57(3), pages 289-316, September.
  11. Ererdem, Ozgür Kaan, 2010. "Public deficit sustainability, public debt and monetization in an endogenous growth model: an application for Turkey," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4341, Paris Dauphine University.
  12. Matteo Formenti, 2008. "Indicators and Tests of Sustainability: The Italian Case," Rivista di Politica Economica, SIPI Spa, SIPI Spa, vol. 98(6), pages 123-160, November-.
  13. Futagami, Koichi & Shibata, Akihisa, 2003. "Budget Deficits and Economic Growth," Discussion Paper, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University 133, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  14. Lecturer Gheorghița Dincă Ph. D, Assoc. Prof. Marius Sorin Dincă Ph. D, 2011. "The Evolution Of The Romanian Public Debt During The Last 10 Years," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, University of Craiova, Faculty of Economics and Business Administration, vol. 4(39), pages 100-109, May.
  15. Mark A. Roberts, . "A portfolio explanation of the relationship between macroeconomic volatility and economic growth," Discussion Papers 11/14, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  16. Real Arai & Takuma Kunieda & Keigo Nishida, 2014. "Is Public Debt Growth-Enhancing or Growth-Reducing?," KIER Working Papers, Kyoto University, Institute of Economic Research 884, Kyoto University, Institute of Economic Research.
  17. de la Croix, David & Michel, Philippe, 1999. "National Debt Sustainability and the Dynamics in the Economy of Diamond," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 1999015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  18. Miller, Marcus & Rankin, Neil & Zhang, Lei, 2012. "Borrowing from thy neighbour: a European perspective on sovereign debt," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 73, Competitive Advantage in the Global Economy (CAGE).

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