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Public Debt As Private Wealth: Some Equilibrium Considerations

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  • Ekkehart Schlicht

Abstract

Government bonds are interest-bearing assets. Increasing public debt increases wealth, income and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It distributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher private consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending and may rule out macroeconomic equilibrium. As an aside, a minor flaw in Domar's (American Economic Review, 34 (4), pp. 798-827) classical analysis is corrected. Copyright � 2006 The Author; Journal compilation � 2006 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Metroeconomica.

Volume (Year): 57 (2006)
Issue (Month): 4 (November)
Pages: 494-520

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Handle: RePEc:bla:metroe:v:57:y:2006:i:4:p:494-520

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  1. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
  2. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  3. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  4. Robert-Paul Berben & Teunis Brosens, 2005. "The Impact of Government Debt on Private Consumption in OECD Countries," DNB Working Papers, Netherlands Central Bank, Research Department 045, Netherlands Central Bank, Research Department.
  5. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  6. Sayer, Stuart, 1989. " Macroeconomic Theory and Policy," Journal of Economic Surveys, Wiley Blackwell, vol. 3(4), pages 353-74.
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Cited by:
  1. Soon Ryoo & Peter Skott, 2013. "Public debt and full employment in a stock-flow consistent model of a corporate economy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 35(4), pages 511-528, July.
  2. Peter Skott & Soon Ryoo, 2011. "Public debt in an OLG model with imperfect competition," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2011-25, .
  3. Schlicht, Ekkehart, 2013. "Unexpected Consequences of Ricardian Expectations," Discussion Papers in Economics 14847, University of Munich, Department of Economics.
  4. Nakatani, Takeshi & Skott, Peter, 2007. "Japanese growth and stagnation: A Keynesian perspective," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 18(3), pages 306-332, September.
  5. Peter Skott & Soon Ryoo, 2013. "Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2013-10, .
  6. Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy.
  7. Muriel Pucci & Bruno Tinel, 2010. "Réductions d'impôts et dette publique : un lien à ne pas occulter," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00488760, HAL.
  8. Peter Skott & Soon Ryoo, 2012. "Public Debt and Functional Finance in an OLG Model with Imperfect Competition," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2012-10, .

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