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Public debt and time preferences: Insolvency, excessive saving and in between

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  • Tsur, Yacov

Abstract

Democracy tends to cultivate short-sighted politicians, for whom the horizon extends more or less till next election. This feature gives rise to a discrepancy between the time rate of discount of a country’s polity and the interest rates at which the country borrows. I show how this discrepancy induces public debt swelling. Moreover, if the discrepancy exceeds a certain threshold, public debt will accumulate to the point of insolvency and, to make matter worse, this (unfortunate) state of affairs will be approached at a finite time. Conversely, if budget decision makers are so far-sighted that their time rate of discount is smaller than the relevant interest rate, the country becomes an excessive saver. If the polity’s time rate of discount falls neither below the market interest rate nor exceeds it too much, equilibrium will be reached at a debt-to-GDP ratio between insolvency and excessive saving. Economic growth exacerbates the debt accumulation problem, making insolvency more likely compared to a ceteris-paribus stationary economy.

Suggested Citation

  • Tsur, Yacov, 2012. "Public debt and time preferences: Insolvency, excessive saving and in between," Discussion Papers 137712, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
  • Handle: RePEc:ags:huaedp:137712
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    References listed on IDEAS

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    Keywords

    Public debt; democracy; time preferences; insolvency; Consumer/Household Economics; Demand and Price Analysis; Financial Economics; Political Economy; Public Economics; C61; H61; H63;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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