MAXIMUM SUSTAINABLE GOVERNMENT DEBT IN THE PERPETUAL YOUTH MODEL
Article first published online: 22 JAN 2013
© 2013 The Author. Bulletin of Economic Research © 2013 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.
Bulletin of Economic Research
How to Cite
Rankin, N. (2013), MAXIMUM SUSTAINABLE GOVERNMENT DEBT IN THE PERPETUAL YOUTH MODEL. Bulletin of Economic Research. doi: 10.1111/j.1467-8586.2012.00475.x
- Article first published online: 22 JAN 2013
- maximum sustainable government debt;
- overlapping generations;
- uncertain lifetimes
The overlapping-generations model of Blanchard, based on a constant probability of death, is used to study the maximum level of government debt consistent with the existence of a steady state equilibrium. In both a small open and a closed economy it is shown that maximum sustainable debt robustly occurs where the consumption of individual households reaches zero, the limit of its feasible range. Taxation absorbs all of the household's labour income here. In a closed economy, at this point the real interest rate also hits a ‘ceiling’ given by a simple combination of preference parameters and the death probability.