IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The maximum debt-GDP ratio and endogenous growth in the Diamond overlapping generations model: Three overlapping generations are better than two

  • Mark Roberts
Registered author(s):

    While the public debt has an interior maximum in the Diamond OLG model, due to an inherent nonlinearity [Rankin and Roffia (2003)], this feature also extends to a linear, AK model when it is conjoined with a backward-looking adjustment process for public debt [Braeuninger (2005)]. We show that if the debt dynamics are forward-looking, the maximum will instead be at a degeneracy – another possibility considered by Rankin and Roffia. However, the main point of the present paper is to show that any debt maximum in a finite-horizon model will be of an implausibly low order of magnitude, unless households save over at least two periods. This is because it is the debt flow that crowds-out investment flows, while this is synonymous with the debt stock in a model with only two, non-altruistic, overlapping generations, thus leading to a low maximum stock by default. Removing this restriction produces plausible results, and causes a low rate of economic growth to be a cause as well as a consequence of a high public debt.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 2013/01.

    in new window

    Date of creation: 2014
    Date of revision:
    Handle: RePEc:not:notcfc:14/01
    Contact details of provider: Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
    Phone: (44) 0115 951 5620
    Fax: (0115) 951 4159
    Web page:

    More information through EDIRC

    References listed on IDEAS
    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.:

    as in new window
    1. Mark A Roberts, 2013. "Fiscal rules and the maximum sustainable size of the public debt in the Diamond overlapping generations model," Discussion Papers 2013/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    3. 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.
    4. 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.
    5. Alfred Greiner & Uwe Köller & Willi Semmler, 2007. "Debt sustainability in the European Monetary Union: Theory and empirical evidence for selected countries," Oxford Economic Papers, Oxford University Press, vol. 59(2), pages 194-218, April.
    6. Mark Roberts, 2014. "A non-monotonic relationship between public debt and economic growth: the effect of financial monopsony," Discussion Papers 2014/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    7. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    8. 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.
    9. 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.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:not:notcfc:14/01. 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.