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Maximum Sustainable Government Debt in the Overlapping Generations Model

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Author Info

  • Rankin, N.
  • Roffia, B.

Abstract

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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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/plural.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 521.

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Length: 28 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:wrk:warwec:521

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Keywords: GOVERNMENT DEBT ; OVERLAPPING GENERATIONS;

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