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Growth-Maximizing Public Debt Under Changing Demographics

Author

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  • Bokan, Nikola
  • Hallett, Andrew Hughes
  • Hougaard Jensen, Svend E.

Abstract

This paper develops an overlapping-generations model to study the growth-maximizing level of public debt under conditions of demograhic change. It is shown that the optimal debt level depends on a positive marginal productivity of public capital. In general, it also depends on the demographic parameters, but not if the government is not allowed to borrow to cover revenue shortfalls for current age-related spending. In that context, balanced budget rules are not an approriate form of fiscal rule. The implication is that a government facing demograhic change or demands for more welfare spending will have to adjust its fiscal plans to accommodate those changes, most likely downward, if growth is to be preserved. An advantage of this model is that it allows us to determine in advance the way in which fiscal policies need to adjust as demographic parameters change.

Suggested Citation

  • Bokan, Nikola & Hallett, Andrew Hughes & Hougaard Jensen, Svend E., 2016. "Growth-Maximizing Public Debt Under Changing Demographics," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1640-1651, September.
    • Handle: RePEc:cup:macdyn:v:20:y:2016:i:06:p:1640-1651_00
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    Cited by:

    1. Hughes Hallett, Andrew & Hougaard Jensen, Svend E. & Sveinsson, Thorsteinn Sigurdur & Vieira, Filipe, 2019. "Sustainable fiscal strategies under changing demographics," European Journal of Political Economy, Elsevier, vol. 57(C), pages 34-52.
    2. Kamiguchi, Akira & Tamai, Toshiki, 2023. "Public investment, national debt, and economic growth: The role of debt finance under dynamic inefficiency," Journal of Macroeconomics, Elsevier, vol. 77(C).
    3. Daisuke Miyashita, 2023. "Public debt and income inequality in an endogenous growth model with elastic labor supply," International Journal of Economic Policy Studies, Springer, vol. 17(2), pages 447-472, August.
    4. Svend E. Hougaard Jensen & Thorsteinn Sigurdur Sveinsson & Filipe Bonito Vieira, 2021. "From Here to There: Achieving Fiscal Sustainability Under Alternative Demographic Contingencies," De Economist, Springer, vol. 169(4), pages 427-444, November.
    5. Ueshina, Mitsuru, 2018. "The effect of public debt on growth and welfare under the golden rule of public finance," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 1-11.

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