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Public Debt as Private Wealth

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  • Schlicht, Ekkehart

Abstract

Government bonds are interest-bearing assets. Increasing public debt increases income, wealth, and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It distributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending or may even rule out the existence of macroeconomic equilibrium altogether. Domar(1944) and Gehrels(1957) have discussed similar issues in an unemployment setting. In contrast, this note considers the full employment case and looks at adjustments in debt, taxes and government spending that preserve full employment. The explicit modelling of some adjustment processes that have not been considered in the earlier contributions leads to somewhat different and, in a sense, more "debt-friendly" results.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 2143.

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Date of creation: Feb 2008
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Handle: RePEc:lmu:muenec:2143

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Keywords: stabilization policy; government debt; public debt; functional finance; Maastricht treaty; Ricardian equivalence; functional finance;

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References

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  1. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  2. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Papers 728, Queen's University, Department of Economics.
  3. Sayer, Stuart, 1989. " Macroeconomic Theory and Policy," Journal of Economic Surveys, Wiley Blackwell, vol. 3(4), pages 353-74.
  4. Robert-Paul Berben & Teunis Brosens, 2005. "The Impact of Government Debt on Private Consumption in OECD Countries," DNB Working Papers 045, Netherlands Central Bank, Research Department.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Die optimale Staatsverschuldung
    by Ekkehart Schlicht in Funktionale Staatsfinanzen on 2011-11-22 06:07:00
  2. Greg Mankiw und er Quotenfetischismus
    by Ekkehart Schlicht in Funktionale Staatsfinanzen on 2013-04-05 12:06:00
  3. Quotenfetischismus (in milder Form) sogar bei Greg Mankiw
    by Ekkehart Schlicht in Funktionale Staatsfinanzen on 2013-04-05 14:13:00
  4. Greg Mankiw und der Quotenfetischismus.
    by Ekkehart Schlicht in Funktionale Staatsfinanzen on 2013-04-05 11:05:00
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Cited by:
  1. Peter Skott & Soon Ryoo, 2011. "Public debt in an OLG model with imperfect competition," UMASS Amherst Economics Working Papers 2011-25, University of Massachusetts Amherst, Department of Economics.
  2. Peter Skott & Soon Ryoo, 2013. "Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate," UMASS Amherst Economics Working Papers 2013-10, University of Massachusetts Amherst, Department of Economics.
  3. Soon Ryoo & Peter Skott, 2011. "Public debt and full employment in a stock-flow consistent model of a corporate economy," UMASS Amherst Economics Working Papers 2011-26, University of Massachusetts Amherst, Department of Economics.
  4. Schlicht, Ekkehart, 2013. "Unexpected Consequences of Ricardian Expectations," Discussion Papers in Economics 14847, University of Munich, Department of Economics.
  5. Schlicht, Ekkehart, 2012. "A case where Barro expectations are not rational," Economics Discussion Papers 2012-13, Kiel Institute for the World Economy.
  6. Muriel Pucci & Bruno Tinel, 2010. "Réductions d'impôts et dette publique : un lien à ne pas occulter," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00488760, HAL.
  7. Peter Skott & Soon Ryoo, 2012. "Public Debt and Functional Finance in an OLG Model with Imperfect Competition," UMASS Amherst Economics Working Papers 2012-10, University of Massachusetts Amherst, Department of Economics.
  8. Nakatani, Takeshi & Skott, Peter, 2007. "Japanese growth and stagnation: A Keynesian perspective," Structural Change and Economic Dynamics, Elsevier, vol. 18(3), pages 306-332, September.

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