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A Theory of Public Debt Overhang

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  • Kobayashi, Keiichiro

Abstract

In this paper we analyze the effects of unsustainable public debt on technology choice and economic growth. Unsustainable public debt undermines the credibility of government policy because the government will do whatever necessary to postpone fiscal consolidation, as an incumbent government inevitably falls from power upon implementing fiscal consolidation. We show that the lack of commitment makes firms’ choice of technology inefficient. Fiscal consolidation can restore credibility and high growth in the baseline model, while with a different policy setting in the modified model fiscal consolidation may not be able to restore redibility and growth if it is implemented too late.

Suggested Citation

  • Kobayashi, Keiichiro, 2013. "A Theory of Public Debt Overhang," CIS Discussion paper series 589, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:cisdps:589
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    References listed on IDEAS

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    Cited by:

    1. Rae Gavin, 2016. "Public Debt and Its Impact on the Polish Economy and Society," Journal of Management and Business Administration. Central Europe, De Gruyter Open, vol. 24(1), pages 89-112, March.

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