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Sustainable Public Debt, Credit Constraints, and Social Welfare

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  • Real Arai

    ()
    (Institute of Economic Research, Kyoto University)

  • Takuma Kunieda

    ()
    (Department of Economics and Finance, City University of Hong Kong)

Abstract

Whether the sustainability of public debt is promoted or foiled by credit market imperfections depends upon the fiscal policy rules. Under the golden rule, as credit constraints dissipate, public debt is more likely sustainable, whereas under the balanced budget rule, it is less likely sustainable. We also examine the social welfare under the two different fiscal rules. The balanced budget rule is more beneficial to the super-near future generations than the golden rule, whereas the golden rule is more beneficial to the near future generations than the balanced budget rule. However, to the far future generations, the balanced budget rule once again becomes more beneficial than the golden rule.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP732.pdf
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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 732.

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Length: 44pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:kyo:wpaper:732

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Keywords: Fiscal sustainability; credit constraints; social welfare; heterogeneous agents endogenous growth;

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