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The Debt to GDP Ratio When Not All Savings Is Used for Consumption

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  • Yasuhito Tanaka

Abstract

One of the most commonly used conditions for examining fiscal stability is the Domar condition. It compares the interest rate with the economic growth rate under balanced budget (excluding interest payments), and if the former is greater than the latter, public finances will become unstable, and the outstanding government debt will continue to grow. In this note we consider a problem of the debt to GDP ratio when not all savings of consumers of a generation is not used for consumption by consumers of the next generation using a simple macroeconomic model without complicated microeconomic foundation. If not all savings of consumers is not used for consumption, demand is insufficient, and we need larger budget deficit to maintain full employment in a growing economy. However, we show that fiscal instability or un-sustainability do not occur even if not all savings is used for consumption, and the interest rate exceeds the growth rate.

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Handle: RePEc:mth:iss888:v:10:y:2022:i:1:p:1-13
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References listed on IDEAS

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  1. Masayuki Otaki, 2015. "Price Theory in a Monetary Economy," Advances in Japanese Business and Economics, in: Keynesian Economics and Price Theory, edition 127, chapter 2, pages 15-41, Springer.
  2. L. Randall Wray, 2024. "Modern Money Theory," Springer Books, Springer, edition 3, number 978-3-031-47884-0, January.
  3. Masayuki Otaki, 2015. "Keynesian Economics and Price Theory," Advances in Japanese Business and Economics, Springer, edition 127, number 978-4-431-55345-8.
  4. Otaki, Masayuki, 2007. "The dynamically extended Keynesian cross and the welfare-improving fiscal policy," Economics Letters, Elsevier, vol. 96(1), pages 23-29, July.
  5. Otaki, Masayuki, 2009. "A welfare economics foundation for the full-employment policy," Economics Letters, Elsevier, vol. 102(1), pages 1-3, January.
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