Fiscal rules and the maximum sustainable size of the public debt in the Diamond overlapping generations model
We show that the size of the maximum sustainable public debt in the Diamond (1965) OLG model depends on the choice of fiscal instrument. If tax revenue is exogenous, there is a maximum at an interior or bifurcation point, as in Rankin and Roffia’s (2003) initial paper but at a generally higher level than for their case of an exogenous debt. Conversely, if income tax rates are exogenous, the technical maximum is at a corner-point of degeneracy, provided the first Inada condition holds. However, as this implies notional average taxes of 100%, a Laffer Curve becomes important, giving rise to another concept of the maximum debt. More generally, for this closed economy case, the form of the production function in conjunction with the fiscal rule will determine whether the maximum debt is reached at a technical point of bifurcation or at a more behavioural one where tax payers en masse deny further payments to bond holders.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (44) 0115 951 5620
Fax: (0115) 951 4159
Web page: http://www.nottingham.ac.uk/cfcm/index.aspx
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.:
- Eaton, Jonathan, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 435-45, July.
- Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
- de la Croix,David & Michel,Philippe, 2002.
"A Theory of Economic Growth,"
Cambridge University Press, number 9780521806428.
- Bohn, H., 1990.
"The Sutainability Of Budget Deficits In A Stochastic Economy,"
Weiss Center Working Papers
6-90, Wharton School - Weiss Center for International Financial Research.
- Bohn, Henning, 1995. "The Sustainability of Budget Deficits in a Stochastic Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 257-71, February.
- Chalk, Nigel A., 2000. "The sustainability of bond-financed deficits: An overlapping generations approach," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 293-328, April.
- Feldstein, Martin S, 1977. "The Surprising Incidence of a Tax on Pure Rent: A New Answer to an Old Question," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 349-60, April.
- Karl Farmer & Jacopo Zotti, 2010. "Sustainable government debt in a two-good, two-country overlapping generations model," International Review of Economics, Springer, vol. 57(3), pages 289-316, September.
- Rowthorn, Robert, 1999. "Unemployment, Wage Bargaining and Capital-Labour Substitution," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 413-25, July.
- Michael Brauninger, 2005. "The Budget Deficit, Public Debt, and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 827-840, December.
- Buchanan, James M & Lee, Dwight R, 1982. "Politics, Time, and the Laffer Curve," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 816-19, August.
- Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
When requesting a correction, please mention this item's handle: RePEc:not:notcfc:13/07. 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: (Hilary Hughes)
If references are entirely missing, you can add them using this form.