The sustainability of bond-financed deficits: An overlapping generations approach

Chalk, Nigel

doi:10.1016/s0304-3932(99)00052-5

Cited by 67 publications

(84 citation statements)

References 18 publications

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“…It turns out that the maximum sustainable primary deficit is actually quite small, amounting to less than one percent of output. This number is much lower than the 5.2% threshold that Chalk (2000) obtains for the maximal deficit ratio based on a quantitative overlapping generations model. Another finding for the calibrated model is that changes of the deficit ratio have opposite effects on credit and capital, on the one hand, and on TFP, on the other hand.…”

Section: Introductioncontrasting

confidence: 56%

“…As can also be seen from Figure 1, the maximum sustainable deficit ratio implied by this calibration is at ξ = 0.834%. This is much lower than the value for the maximum deficit obtained from quantitative overlapping generations models: Chalk (2000) finds that primary deficits up to 5.2% are sustainable, while Bullard and Russell (1999) calibrate a similar model with a primary deficit of 1.9%. Both papers have an even larger gap between the growth rate and the real interest rate.…”

Section: Resultsmentioning

confidence: 58%

“…This paper relates to the literature on overlapping generations models in which dynamic inefficiency can give rise to the existence of rational bubbles and to the possibility of debt Ponzi schemes so that governments are able to finance primary deficits indefinitely (Diamond (1965), Tirole (1985), Blanchard (1985) and Weil (1987)). 1 Bullard and Russell (1999) and Chalk (2000) consider quantitative overlapping generations economies with low interest rates and unbacked debt, and the latter explicitly calculates maximum sustainable deficit levels. Rankin and Roffia (2003) are interested in maximum sustainable debt (rather than deficits) in an overlapping generations model.…”

Section: Introductionmentioning

confidence: 99%

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Public debt and total factor productivity

Kaas

2015

Econ Theory

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Public Debt and Total Factor Productivity Abstract This paper explores the role of public debt and fiscal deficits on factor productivity in an economy with credit market frictions and heterogeneous firms. When credit market conditions are sufficiently weak, low interest rates permit the government to run Ponzi schemes so that permanent primary deficits can be sustained. For small enough deficit ratios, the model has two steady states of which one is an unstable bubble and the other one is stable. The stable equilibrium features higher levels of credit and capital, but also a lower interest rate, lower total factor productivity and output. The model is calibrated to the US economy to derive the maximum sustainable deficit ratio and to examine the dynamic responses to changes in debt policy. A reduction of the primary deficit triggers an expansion of credit and capital, but it also leads to a deterioration of total factor productivity since more low-productivity firms prefer to remain active at the lower equilibrium interest rate. Terms of use: Documents inJEL-Code: D920, E620, H620.

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Section: Introductioncontrasting

confidence: 56%

Section: Resultsmentioning

confidence: 58%

Section: Introductionmentioning

confidence: 99%

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Public debt and total factor productivity

Kaas

2015

Econ Theory

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“…Here, it can be argued that high currency devaluation in the sense of an inflationary tax can tend to lower state indebtedness (cf. [83] p. 295; [23] p. 305). The natural (energy-) resources available in a country and the interest level were also regarded as potential indicators.…”

Section: Fiscal Sustainability and Regime Typementioning

confidence: 99%

Sustainability of Fiscal Policy in Democracies and Autocracies

Wurster

2015

CiS

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This paper tries to identify the fiscal sustainability record of democratically and autocratically governed countries by applying various performance indicators (payment defaults, national debt, foreign assets) and also to clarify what effect the characteristics of a regime have on consolidation and intertemporal budgeting efforts in a country. Important economic, social and environmental challenges of the future cannot be addressed if long term financial viability is not preserved in a country. The study identifies two key findings: while in the past, democracies have clearly found it easier to preserve their solvency and to avoid government bankruptcy, a similar advantage can no longer be detected for democracies in terms of reducing national debt and foreign debts. Why democracies, in spite of their arrangements with a sensitivity for the public good and for due process, are finding it so difficult to avoid shifting their debts to future generations (to undertake cutback measures and to provide sufficient financial foresight) can in principle be interpreted as the other side of the coin, namely highly presence-oriented interests boosted even further through the short democracy-specific time horizon.

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“…On the dynamically inefficient path, however, public debt issuance may make future generations better off because it remedies capital overaccumulation (see Diamond 1965 andTirole 1985). Chalk (2000) and Rankin and Roffia (2003) examine whether there is a path toward the dynamically inefficient steady state where the government rolls over the debt forever, implying that future generations are not worse off on that path. In an uncertain economy setting, Bohn (1995), Ball et al (1998), and Blanchard and Weil (2001) distinguish the rate of return on public bonds from that on physical capital to find a positive probability of deficit sustainability on the dynamically efficient path.…”

Section: Introductionmentioning

confidence: 99%

Public Debt Places No Burden on Future Generations under Demand Shortage

Ogawa

Ono

2010

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractIn a Diamond-type overlapping-generations setting public debt issuance places no burden on future generations including those who repay the debt if prices and wages are fixed and unemployment occurs in the periods in which public bonds are issued and repaid. Whether the collected fund is spent on government purchases or transfers to the present generation, public bond issuance stimulates aggregate demand and creates additional employment of future generations, which yields additional income that is large enough to cover their tax burden. This property is true whether the debt is repaid by children or grandchildren.

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The sustainability of bond-financed deficits: An overlapping generations approach

Cited by 67 publications

References 18 publications

Public debt and total factor productivity

Public debt and total factor productivity

Sustainability of Fiscal Policy in Democracies and Autocracies

Public Debt Places No Burden on Future Generations under Demand Shortage

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