On the role of public debt in an OLG model with endogenous labor supply
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:1323-1328. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.