La dette publique peut-elle rester indolore?

We build a balanced growth model, using ?non-Ricardian? behavior in the private sector, and a set of both risky (capital) and safe assets (money and government debt), and examine the consequences of a sharp increase of the budget deficit, when r < g. In a non-monetary model (with no inflation), the real interest rate must rise, and a crowding out occurs: the primary budget must fall to leave room to the interest rate charge of mounting debt and higher rates. As the debt ratio increases, the primary deficit describes a ?Laffer curve?, going through a maximum and then decreasing. There is no way of avoiding an austerity phase. In a monetary version of the model, the scenarios are contrasted. If the money supply is endogenous or the interest rate constant, the economy converges to a new equilibrium where inflation must fall to enable the rise in the real interest rate. If the Central bank follows a monetary target (a given increase of the stock of money), it controls the inflation rate and leaves the interest rate to adjust. A financial repression policy enables a depreciation of the public debt and a surge of inflation, with a reduction of the real interest rate.