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Involuntary unemployment and sustainability of bond-financed fiscal deficit

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  • Yakita, Akira

Abstract

We analyze the link between the sustainability of bond-financed deficit policy and involuntary unemployment in an overlapping generations model incorporating the fair wage hypothesis. If the fiscal deficit policy is sustainable, reductions in bond-financed deficit increase per worker capital stock and lower the unemployment rate in the long term, though the policy will raise the unemployment rate in the short term. When population growth is sufficiently low and/or per worker public debt is sufficiently large, population aging will not only increase per worker public debt but also raise the unemployment rate, thereby running counter to the bond-financed deficit cut policy.

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  • Yakita, Akira, 2014. "Involuntary unemployment and sustainability of bond-financed fiscal deficit," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 79-93.
    • Handle: RePEc:eee:jmacro:v:41:y:2014:i:c:p:79-93
    DOI: 10.1016/j.jmacro.2014.05.003
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    More about this item

    Keywords

    Efficiency wage; Involuntary unemployment; Fiscal sustainability; Public debt; Population aging;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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