Sustainability and Optimality of Public Debt
Springer Science & Business Media, Dec 13, 2012 - Business & Economics - 212 pages
This book studies the sustainability and optimality of public debt under different scenarios: the closed economy, the small open economy, and a two-country setting. Sustainability refers to the existence and the stability of the long-run equilibrium. Optimality relates to the path of public debt that maximizes discounted utility. The analysis is conducted within the framework of the Solow model, the overlapping generations model and the infinite horizon model. The government can follow different strategies, it either fixes the deficit ratio or the tax rate. As a result, a fixed deficit ratio generally can be sustained. By contrast, a fixed tax rate generally cannot be sustained. Depending on the chosen fiscal strategy, there exists either an optimal deficit ratio or an optimal tax rate that maximizes the sum of consumption and government purchases per capita.
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2 A Brief Survey of the Literature
Part I The Closed Economy
Part II The Small Open Economy
Part III Two Countries
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assets per head budget deficit capita terms respectively capital per head capital-output ratio Carlberg closed economy const consumption and government consumption per head critical level current account surplus debt per head deﬁcit deficit and public deficit per head discount rate economy with public endogenous Figure fixed deficit ratio fixed tax rate fixes the deficit fixes the tax foreign assets foreign debt government fixes government purchases head and capital head and foreign head are uniform income per head interest per head interest rate investment per head labour growth long-run equilibrium lumpsum tax medium run natural rate numerical example optimal deficit ratio optimal saving ratio optimal tax rate output per head overlapping generations model Permanent Tax Cut phase diagram public debt purchase ratio purchases per head rate falls short rzoty/k short-run equilibrium Solow model stable steady surplus per head surplus ratio Sustainability and Optimality tax per head unstable zero