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Public Debt and Functional Finance in an OLG Model with Imperfect Competition

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  • Peter Skott

    ()
    (University of Massachusetts, Amherst)

  • Soon Ryoo

    ()
    (Adelphi University)

Abstract

This paper examines the role of fiscal policy in the long run. We show that (i) dynamic inefficiency may be empirically relevant in a modified Diamond OLG model with imperfect competition, (ii) fiscal policy may be needed to avoid inefficiency (if investment adjusts passively to saving) and maintain full employment (if investment and saving decisions are taken separately), (iii) a simple and distributionally neutral tax scheme can maintain full employment in the face of variations in 'household confidence', and (iv) the debt ratio is inversely related to both the growth rate and government consumption. JEL Categories: E62, E22

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Bibliographic Info

Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2012-10.

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Date of creation: Dec 2012
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Handle: RePEc:ums:papers:2012-10

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Keywords: Public debt; Keynesian OLG model; dynamic efficiency; confidence; sustainability;

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References

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  1. Wynne Goldey & Marc Lavoie, 2007. "Fiscal policy in a stock-flow consistent (SFC) model," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 30(1), pages 79-100, October.
  2. Finn Olesen, 2001. "Jørgen Pedersen: An Early Danish Contributor to Keynesian Economics," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 24(1), pages 31-40, October.
  3. 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.
  4. Philip Arestis & Malcolm Sawyer, 2010. "The return of fiscal policy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 32(3), pages 327-346, April.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," NBER Working Papers 15639, National Bureau of Economic Research, Inc.
  6. Jan Kregel, 2010. "Fiscal Responsibility: What Exactly Does It Mean?," Economics Working Paper Archive wp_602, Levy Economics Institute.
  7. Schlicht, Ekkehart, 2004. "Public Debt as Private Wealth," Discussion Papers in Economics 371, University of Munich, Department of Economics.
  8. Pagano, Marco, 1989. "Imperfect Competition, Underemployment Equilibria and Fiscal Policy," CEPR Discussion Papers 280, C.E.P.R. Discussion Papers.
  9. Skott,Peter, 1989. "Conflict and Effective Demand in Economic Growth," Cambridge Books, Cambridge University Press, number 9780521365963, April.
  10. d ASPREMONT, Claude & DOS SANTOS FERREIRA, Rodolphe & GERARD-VARET, Louis-André, 1994. "Imperfect Competition in an Overlapping Generations Model : A Case for Fiscal Policy," CORE Discussion Papers 1994077, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. 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.
  12. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  14. Peter Skott, . "Demand Policy in the Long Run," Economics Working Papers 2000-17, School of Economics and Management, University of Aarhus.
  15. Lopez-Garcia, Miguel-Angel, 2008. "On the role of public debt in an OLG model with endogenous labor supply," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1323-1328, September.
  16. Jacobsen, Hans Jorgen & Schultz, Christian, 1994. "On the effectiveness of economic policy when competition is imperfect and expectations are rational," European Economic Review, Elsevier, vol. 38(2), pages 305-327, February.
  17. Peter Skott & Soon Ryoo, 2008. "Macroeconomic implications of financialisation," Cambridge Journal of Economics, Oxford University Press, vol. 32(6), pages 827-862, November.
  18. Paul Krugman & Gauti B. Eggertsson, 2011. "Debt, Deleveraging and the Liquidity Trap," 2011 Meeting Papers 1166, Society for Economic Dynamics.
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Cited by:
  1. Phillip Anthony O’Hara, 2013. "Policies and Institutions for Moderating Deep Recessions, Debt Crises and Financial Instabilities," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(1), pages 19-49, March.

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