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Public Debt As Private Wealth: Some Equilibrium Considerations

  • Ekkehart Schlicht

Government bonds are interest-bearing assets. Increasing public debt increases wealth, income 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 private 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 and may rule out macroeconomic equilibrium. As an aside, a minor flaw in Domar's (American Economic Review, 34 (4), pp. 798-827) classical analysis is corrected. Copyright � 2006 The Author; Journal compilation � 2006 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Metroeconomica.

Volume (Year): 57 (2006)
Issue (Month): 4 (November)
Pages: 494-520

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Handle: RePEc:bla:metroe:v:57:y:2006:i:4:p:494-520
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  1. Sayer, Stuart, 1989. " Macroeconomic Theory and Policy," Journal of Economic Surveys, Wiley Blackwell, vol. 3(4), pages 353-74.
  2. 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.
  3. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," NBER Working Papers 2685, National Bureau of Economic Research, Inc.
  4. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
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