Working Paper: NBER ID: w30554
Authors: Andrew B. Abel; Stavros Panageas
Abstract: Government debt can be rolled over forever without primary surpluses in some stochastic economies, including some economies that are dynamically efficient. In an overlapping-generations model with constant growth rate, g, of labor-augmenting productivity, and with shocks to the durability of capital, we show that along a balanced growth path, the maximum sustainable ratio of bonds to capital is attained when the riskfree interest rate, r[sub]f, equals g. Furthermore, this maximal ratio maximizes utility per capita along a balanced growth path and ensures that the economy is dynamically efficient.
Keywords: government debt; dynamically efficient economy; bond-capital ratio; welfare maximization
JEL Codes: E0; E6; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk-free interest rate (rf) (E43) | growth rate (g) (O40) |
| growth rate (g) (O40) | sustainability of government debt (H63) |
| risk-free interest rate (rf) equals growth rate (g) (E43) | rolling over government bonds (E43) |
| bond-capital ratio (G32) | capital crowding out (E62) |
| capital crowding out (E62) | marginal product of capital (E22) |
| marginal product of capital (E22) | rates of return (G12) |
| optimal bond-capital ratio (G32) | welfare (I38) |
| uncertainty in rate of return on capital (G31) | optimal bond-capital ratio (G32) |
| higher variances in durability shocks (L15) | dynamic efficiency (C69) |