The theoretical determinants of maximum sustainable government debt are investigated using Diamond's overlapping-generations model. A level of debt is defined to be 'sustainable' f a steady state with non-degenerate values of economic variables exists. We show that a maximum sustainable level of debt almost always exists. Most interestingly, it normally occurs at a 'catastrophe' ather than a 'degeneracy' , i.e. where variables such as capital and consumption are in the interiors, rather than at the limits, of their economically meaningful ranges. This means that if debt is increased step by step, the economy may suddenly collapse without obvious warning.
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Find related papers by JEL classification: 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
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