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Debt Policy under Fixed and Flexible Prices

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  • Rankin, N

Abstract

The effects of an increase in the stock of government bonds are considered in an economy wit h overlapping generations and perfect foresight, and in the absence of intergene rational bequests. The cases where prices adjust instantaneously to clear market s and whereprices are exogenously fixed, are contrasted (1) in a model with cap ital accumulation but an exogenous labor supply and (2) in a model with exogenou s capital but endogenous labor supply. James Tobin's intuitive argument that, in the absence of bequests, higher debt reduces long-run welfare if prices are fle xible, but increases it iffixed, so producing Keynesian unemployment, is correc t for (1) but incorrect for (2) at high levels of employment. Copyright 1986 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 38 (1986)
Issue (Month): 3 (November)
Pages: 481-500

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Handle: RePEc:oup:oxecpp:v:38:y:1986:i:3:p:481-500

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Cited by:
  1. Rankin, N. & Scalera, D., 1991. "Death and the Keynesian Multiplier," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 376, University of Warwick, Department of Economics.
  2. Yiannis Stournaras, 2005. "Aggregate Supply and Demand, the Real Exchange Rate and Oil Price Denomination," Working Papers, Bank of Greece 26, Bank of Greece.
  3. Takayuki Ogawa, 2005. "Welfare Analysis of Debt Policy during Recessions," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0642, Institute of Social and Economic Research, Osaka University.

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