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Reducing Public Debt under Dynamic Efficiency: Transitional Dynamics in Diamond's OLG Model

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  • Karl Farmer

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Abstract

Fiscal retrenchment is on the political agenda in the U.S. as well as in the EU. Utilizing Diamond's [ 1965 ] classic OLG growth model with internal debt, this paper focuses on temporarily adjusting the ratio of the primary budget surplus to GDP to achieve a target debt to GDP ratio lower than its initial level in the case of dynamic efficiency. The transitional dynamics of the debt to GDP and of the capital–output ratios are rigorously analyzed. It is shown that reducing the public debt to GDP ratio diminishes private capital intensity too. Copyright IAES 2006

Suggested Citation

  • Karl Farmer, 2006. "Reducing Public Debt under Dynamic Efficiency: Transitional Dynamics in Diamond's OLG Model," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 34(2), pages 195-208, June.
  • Handle: RePEc:kap:atlecj:v:34:y:2006:i:2:p:195-208
    DOI: 10.1007/s11293-006-9006-1
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    File URL: http://hdl.handle.net/10.1007/s11293-006-9006-1
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    References listed on IDEAS

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    1. Skilling, David & Zeckhauser, Richard J., 2002. "Political competition and debt trajectories in Japan and the OECD," Japan and the World Economy, Elsevier, vol. 14(2), pages 121-135, April.
    2. Ghate, Chetan & Zak, Paul J., 2002. "Growth of government and the politics of fiscal policy," Structural Change and Economic Dynamics, Elsevier, vol. 13(4), pages 435-455, December.
    3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    4. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, April.
    5. Meijdam, Lex & van de Ven, Martijn & Verbon, Harrie A. A., 1996. "The dynamics of government debt," European Journal of Political Economy, Elsevier, vol. 12(1), pages 67-90, April.
    6. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
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    Cited by:

    1. Karl Farmer, 2014. "Financial Integration and EMU’s External Imbalances in a Two-Country OLG Model," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(1), pages 1-21, February.
    2. Karl Farmer, 2013. "Financial Integration and EMU's External Imbalances in a Two-Country OLG Model," Graz Economics Papers 2013-07, University of Graz, Department of Economics.
    3. Karl Farmer, 2013. "EMU Imbalances in a Two-Country Overlapping Generations Model," EcoMod2013 5484, EcoMod.
    4. repec:kap:iaecre:v:20:y:2014:i:1:p:1-21 is not listed on IDEAS

    More about this item

    Keywords

    E62; H62;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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