Costly Increases in Public Debt when r < g
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Summary:
This paper quantifies the costs of a permanent increase in debt to GDP. We employ a deterministic, overlapping generations model with two assets and no risk of default. The two assets are public debt and private (productive) capital. We assume that the return on private capital equals the interest rate on public debt plus an exogenously given spread. Employing a analytical version of the model we show an example in which a permanent rise in the public debt ratio leads to a significant reduction in steady-state GDP even as r
Series:
Working Paper No. 2024/010
Subject:
Expenditure Financial institutions Government debt management Intangible capital National accounts Public debt Public financial management (PFM) Sovereign bonds
Frequency:
regular
English
Publication Date:
January 12, 2024
ISBN/ISSN:
9798400263620/1018-5941
Stock No:
WPIEA2024010
Format:
Paper
Pages:
29
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