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Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate

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  • Skott Peter

    () (Department of Economics, University of Massachusetts, Amherst, MA 01003, USA, and Aalborg University)

  • Ryoo Soon

    (Department of Finance and Economics, Adelphi University, Garden City, NY 11530, USA)

Abstract

In this paper we consider a modified version of Diamond’s OLG model. We show, first, that dynamic inefficiency may be relevant when the presence of imperfect competition is taken into account. Second, if fiscal policy is used to avoid inefficiency and maintain an optimal capital intensity, the required debt ratio will be inversely related to the growth rate. Third, austerity policies – reductions in government consumption and entitlement programs for the old generation – raise the required debt ratio.

Suggested Citation

  • Skott Peter & Ryoo Soon, 2014. "Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-20, January.
  • Handle: RePEc:bpj:bejmac:v:14:y:2014:i:1:p:20:n:21
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    References listed on IDEAS

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    1. Thomas Herndon & Michael Ash & Robert Pollin, 2014. "Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff," Cambridge Journal of Economics, Oxford University Press, vol. 38(2), pages 257-279.
    2. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Oxford University Press, pages 1-19.
    3. Thomas I. Palley, 2010. "The Simple Macroeconomics of Fiscal Austerity, Public Sector Debt and Deflation," IMK Working Paper 8-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Soon Ryoo & Peter Skott, 2013. "Public debt and full employment in a stock-flow consistent model of a corporate economy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 35(4), pages 511-528.
    5. Bohn, Henning, 2009. "Intergenerational risk sharing and fiscal policy," Journal of Monetary Economics, Elsevier, pages 805-816.
    6. Pagano, Marco, 1990. "Imperfect Competition, Underemployment Equilibria and Fiscal Policy," Economic Journal, Royal Economic Society, vol. 100(401), pages 440-463, June.
    7. Wynne Goldey & Marc Lavoie, 2007. "Fiscal policy in a stock-flow consistent (SFC) model," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 79-100.
    8. Chalk, Nigel A., 2000. "The sustainability of bond-financed deficits: An overlapping generations approach," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 293-328, April.
    9. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, pages 573-578.
    10. Philip Arestis & Malcolm Sawyer, 2010. "The return of fiscal policy," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 32(3), pages 327-346, April.
    11. Schlicht, Ekkehart, 2004. "Public Debt as Private Wealth," Discussion Papers in Economics 371, University of Munich, Department of Economics.
    12. 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.
    13. 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.
    14. Lopez-Garcia, Miguel-Angel, 2008. "On the role of public debt in an OLG model with endogenous labor supply," Journal of Macroeconomics, Elsevier, pages 1323-1328.
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    Cited by:

    1. Peter Skott, 2016. "Aggregate demand, functional finance, and secular stagnation," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 13(2), pages 172-188, September.
    2. Soon Ryoo & Peter Skott, 2017. "Fiscal and Monetary Policy Rules in an Unstable Economy," Metroeconomica, Wiley Blackwell, vol. 68(3), pages 500-548, July.
    3. Skott, Peter & Ryoo, Soon, 2015. "Functional finance and intergenerational distribution in a Keynesian OLG model," UMASS Amherst Economics Working Papers 2015-13, University of Massachusetts Amherst, Department of Economics.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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