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Sustainable Public Debt, Credit Constraints, and Social Welfare

Author

Listed:
  • Real Arai

    () (Institute of Economic Research, Kyoto University)

  • Takuma Kunieda

    () (Department of Economics and Finance, City University of Hong Kong)

Abstract

Whether the sustainability of public debt is promoted or foiled by credit market imperfections depends upon the fiscal policy rules. Under the golden rule, as credit constraints dissipate, public debt is more likely sustainable, whereas under the balanced budget rule, it is less likely sustainable. We also examine the social welfare under the two different fiscal rules. The balanced budget rule is more beneficial to the super-near future generations than the golden rule, whereas the golden rule is more beneficial to the near future generations than the balanced budget rule. However, to the far future generations, the balanced budget rule once again becomes more beneficial than the golden rule.

Suggested Citation

  • Real Arai & Takuma Kunieda, 2010. "Sustainable Public Debt, Credit Constraints, and Social Welfare," KIER Working Papers 732, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:732
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    Keywords

    Fiscal sustainability; credit constraints; social welfare; heterogeneous agents endogenous growth;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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