Government bonds are interest-bearing assets. Increasing public debt increases income, wealth, and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It distributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending or may even rule out the existence of macroeconomic equilibrium altogether. Domar(1944) and Gehrels(1957) have discussed similar issues in an unemployment setting. In contrast, this note considers the full employment case and looks at adjustments in debt, taxes and government spending that preserve full employment. The explicit modelling of some adjustment processes that have not been considered in the earlier contributions leads to somewhat different and, in a sense, more "debt-friendly" results.
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number
2143.
Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook H6 - Public Economics - - National Budget, Deficit, and Debt
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