Public Debt Requirements in A Regime of Price Stability
The logic of this paper is based on a modernisation of Austrian capital theory as applied to a closed economy growing in a steady state. Here the philosophy is this: capital is time embodied in produced goods. In steady states, this philosophy works well as an aggregation device for an arbitrary number of distinct produced goods. The basic theorem of this approach (Section VII) is this: in a capital market equilibrium without public debt and hence in a general equilibrium without public debt the average period of production equals the average waiting period of households. Calibration of the parameters of the production sector and the consumption sector then leads to the result that the equilibrium risk free real rate of interest (Wicksell´s "natural rate of interest") is negative for the OECD+China area. What distinguishes the twenty-first century from earlier times is the high life expectancy of people and the ensuing extensive average pension period. These characteristics are responsible for the high average waiting period. Only with a negative real rate of interest can the average period of production catch up with the high average waiting period. Under price stability the risk free real rate of interest cannot become negative. Public debt causes the equilibrium risk free rate of interest to rise: the public debt period () plus the average period of production (DT) equal the average waiting period (Z). Thus substantial public debt is required for the goal of price stability. We thus come to a different view of public debt: it is inconsistent with the goal of a zero public debt. This different view of public debt (even apart from "Keynesian" considerations) has been introduced by Samuelson already in the year 1958. My "Austrian" capital theoretic approach allows me to show that it is the relevant view for the 21 st century.
|Date of creation:||Aug 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Kurt-Schumacher-Str. 10 - D- 53113 Bonn|
Phone: +49-(0)228 / 91416-0
Fax: +49-(0)228 / 91416-55
Web page: http://www.coll.mpg.de/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:spo:wpecon:info:hdl:2441/8607 is not listed on IDEAS
- Blanchard Olivier & Weil Philippe, 2001.
"Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty,"
The B.E. Journal of Macroeconomics,
De Gruyter, vol. 1(2), pages 1-23, November.
- Olivier J. Blanchard & Philippe Weil, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," Sciences Po publications info:hdl:2441/8607, Sciences Po.
- Olivier J. Blanchard & Philippe Weil, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," Post-Print hal-01030812, HAL.
- Olivier Jean Blanchard & Philippe Weil, 1992. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games Under Uncertainty," NBER Working Papers 3992, National Bureau of Economic Research, Inc.
- Stefan Homburg, 1991. "Interest and Growth in an Economy with Land," Canadian Journal of Economics, Canadian Economics Association, vol. 24(2), pages 450-59, May.
- M. Bruno, 1969. "Fundamental Duality Relations in the Pure Theory of Capital and Growth," Review of Economic Studies, Oxford University Press, vol. 36(1), pages 39-53.
- Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
When requesting a correction, please mention this item's handle: RePEc:mpg:wpaper:2011_20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marc Martin)
If references are entirely missing, you can add them using this form.