Public Debt Accumulation and Fiscal Consolidation
AbstractIn this paper, we analyze the relationship between interest rates on government bonds (GB) and fiscal consolidation rule by using an overlapping generation model with endogenous and stochastic growth settings. Our key findings are summarized as follows. First, interest rates of GB may be declining as public debt accumulates relative to private capital, as opposed to the conventional view that buildup of public debt accompanies a rise in interest rates. Second, fiscal consolidation rule plays a key role in determining interest rates in equilibrium. Third, the economy may exhibit discrete changes with interest rates diverging, implying that our observation of relatively low GB interest rates does not assure the continuation of that trend in the future. Fourth, a preventive tax increase to contain public debt at sustainable levels will not gain the political support of existing generations, whose life span is limited. Citizens prefer to shift the ultimate burden of public debt to future generations.
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Bibliographic InfoPaper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series CIS Discussion paper series with number 517.
Length: 31 p.
Date of creation: May 2011
Date of revision:
Overlapping generation model; interest rate on government bond; fiscal consolidation rule; default risk;
Find related papers by JEL classification:
- E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H5 - Public Economics - - National Government Expenditures and Related Policies
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-05 (All new papers)
- NEP-DGE-2011-09-05 (Dynamic General Equilibrium)
- NEP-MAC-2011-09-05 (Macroeconomics)
- NEP-PBE-2011-09-05 (Public Economics)
- NEP-PUB-2011-09-05 (Public Finance)
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