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Costly Increases in Public Debt when r

Author

Listed:
  • Yongquan Cao
  • Vitor Gaspar
  • Mr. Adrian Peralta Alva

Abstract

This paper quantifies the costs of a permanent increase in debt to GDP. We employ a deterministic, overlapping generations model with two assets and no risk of default. The two assets are public debt and private (productive) capital. We assume that the return on private capital equals the interest rate on public debt plus an exogenously given spread. Employing a analytical version of the model we show an example in which a permanent rise in the public debt ratio leads to a significant reduction in steady-state GDP even as r

Suggested Citation

  • Yongquan Cao & Vitor Gaspar & Mr. Adrian Peralta Alva, 2024. "Costly Increases in Public Debt when r," IMF Working Papers 2024/010, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/010
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    Keywords

    Crowding out; public debt; public debt debt ratio; IMF working paper No. 2024/10; steady state GDP; increases in public debt; tax financing; Government debt management; Sovereign bonds; Intangible capital; Global;
    All these keywords.

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