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On the role of public debt in an OLG model with endogenous labor supply

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  • Lopez-Garcia, Miguel-Angel

Abstract

This paper argues that some propositions reported in a recent paper by [Fanti., L., Spataro, L., 2006. Endogenous labor supply in Diamond's (1965) OLG model: A reconsideration of the debt role. Journal of Macroeconomics 28, 28-438] are not warranted. They claim that including an endogenous labor supply in an overlapping generations model may change the conclusions concerning the capital accumulation and welfare effects of (internal) public debt issue. We show that their results are not the consequence of the Cobb-Douglas preferences they posit, but of a rather incomplete development of their model. When this incompleteness is corrected, and under general assumptions on preferences and technology, the propositions arrived at originally by [Diamond, P.A., 1965. National debt in a neoclassical growth model. American Economic Review 55, 1126-1150] in a model that does not take the labor-leisure decision into account continue to hold. In particular, no matter whether the starting point is a dynamically efficient or inefficient steady state, an increase in the stock of public debt per taxpayer unambiguously depresses the capital-labor ratio and raises the interest rate. Moreover, the welfare level will increase (decrease) when the starting point is a dynamically inefficient (efficient) steady state.

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  • 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.
    • Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:1323-1328
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    References listed on IDEAS

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    1. Fanti, Luciano & Spataro, Luca, 2006. "Endogenous labor supply in Diamond's (1965) OLG model: A reconsideration of the debt role," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 428-438, June.
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    Cited by:

    1. Kuhle, Wolfgang, 2012. "Dynamic efficiency and the two-part golden rule with heterogeneous agents," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 992-1006.
    2. repec:ums:papers:2012-10 is not listed on IDEAS
    3. Takayuki Ogawa & Yoshiyasu Ono, 2010. "Public Debt Places No Burden on Future Generations under Demand Shortage," ISER Discussion Paper 0791, Institute of Social and Economic Research, Osaka University.
    4. Andreas Bachmann & Kaspar W thrich, 2013. "Evaluating pay-as-you-go social security systems," Diskussionsschriften dp1310, Universitaet Bern, Departement Volkswirtschaft.
    5. Andersen, Torben M. & Bhattacharya, Joydeep, 2013. "Unfunded Pensions And Endogenous Labor Supply," Macroeconomic Dynamics, Cambridge University Press, vol. 17(5), pages 971-997, July.
    6. 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.
    7. Vogel, Edgar, 2014. "Optimal level of government debt - matching wealth inequality and the fiscal sector," Working Paper Series 1665, European Central Bank.
    8. Vogel, Edgar, 2014. "Optimal Level of Government Debt: Matching Wealth Inequality and the Fiscal Sector," MEA discussion paper series 201410, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.

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    1. Andreas Bachmann & Kaspar W thrich, 2013. "Evaluating pay-as-you-go social security systems," Diskussionsschriften dp1310, Universitaet Bern, Departement Volkswirtschaft.

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