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Budget deficit for full-employment under growth and inflation by excessive deficit in an OLG model with bequest motive

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  • Tanaka, Yasuhito

Abstract

We will show, using a simple two-periods overlapping generations (OLG) model with bequest motive in which goods are produced solely by labor in a monopolistically competitive industry, that a continuous budget deficit is necessary to maintain full-employment under economic growth driven by technological progress. Since the budget deficit to maintain full-employment must be continuous, it should be financed by seigniorage not by public debt. Budget deficit is necessary under growth because of deficiency of the consumptions of the older generation. This budget deficit is not debt and does not need to be redeemed. If the budget deficit is excessive, inflation will be triggered. About this excessive budget deficit that has caused inflation, only the excess portion should be reduced, and there is no need to make up for past excesses by creating surpluses or reducing deficits. We also show that insufficient government expenditure causes involuntary unemployment.

Suggested Citation

  • Tanaka, Yasuhito, 2021. "Budget deficit for full-employment under growth and inflation by excessive deficit in an OLG model with bequest motive," MPRA Paper 107218, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107218
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    References listed on IDEAS

    as
    1. Masayuki Otaki, 2015. "Price Theory in a Monetary Economy," Advances in Japanese Business and Economics, in: Keynesian Economics and Price Theory, edition 127, chapter 2, pages 15-41, Springer.
    2. Otaki, Masayuki, 2007. "The dynamically extended Keynesian cross and the welfare-improving fiscal policy," Economics Letters, Elsevier, vol. 96(1), pages 23-29, July.
    3. Brett Fiebiger & Scott Fullwiler & Stephanie Kelton & L. Randall Wray, 2012. "Modern Monetary Theory: A Debate," Working Papers wp279, Political Economy Research Institute, University of Massachusetts at Amherst.
    4. Otaki, Masayuki, 2009. "A welfare economics foundation for the full-employment policy," Economics Letters, Elsevier, vol. 102(1), pages 1-3, January.
    5. Yasuhito Tanaka, 2020. "Involuntary unemployment with indivisible labor supply under perfect competition," Economics Bulletin, AccessEcon, vol. 40(3), pages 1914-1923.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    overlapping generations model; budget deficit; full-employment; growth; inflation;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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