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MAXIMUM SUSTAINABLE GOVERNMENT DEBT IN THE PERPETUAL YOUTH MODEL

Authors

  • Neil Rankin

    Corresponding author
    1. Department of Economics and Related Studies, University of York, York, UK
    • Correspondence: Neil Rankin, Department of Economics and Related Studies, University of York, York YO10 5DD, UK. Tel.: +44 190 432 4567; Fax: +44 190 432 3759; Email: neil.rankin@york.ac.uk.

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  • I would like to thank Marcus Miller for much encouragement and stimulating discussion which led to the writing of this paper. Thanks are also extended to two anonymous referees. Responsibility for all errors and opinions is of course mine alone.

ABSTRACT

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.

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