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A Keynesian Approach to Fiscal Policy for Full Employment and Continuous Time Debt Dynamics

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  • Tanaka Yasuhito

    (Doshisha University,Japan)

Abstract

It is widely argued that public debt is a burden on the future generations. We analyze another aspect of public debt as an economic stimulus program, that is, the measure to realize full employment from an under-employment state. Using a continuous time version of a dynamic analysis of debt-to-GDP ratio we show that a fiscal policy to realize full employment from a state of under-employment can reduce the debt-to-GDP ratio. More precisely we show that the larger the extra growth rate (increasing rate) of real GDP by a fiscal policy is, the smaller the debt-to-GDP ratio at the time when full employment is realized is. Also we show that even if the marginal propensity to consume is very small (including zero), an aggressive fiscal policy can realize full employment without increasing the debt-to-GDP ratio. Further, we consider a condition to realize full employment from a state of under-employment within one year without increasing debt-to-GDP ratio.

Suggested Citation

  • Tanaka Yasuhito, 2020. "A Keynesian Approach to Fiscal Policy for Full Employment and Continuous Time Debt Dynamics," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 65(1), pages 20-38, April.
    • Handle: RePEc:vrs:subboe:v:65:y:2020:i:1:p:20-38:n:2
    DOI: 10.2478/subboec-2020-0002
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. Yoshiyasu Ono, 2011. "The Keynesian Multiplier Effect Reconsidered," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 787-794, June.
    3. Sen, Partha, 2002. "Welfare-improving debt policy under monopolistic competition," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 143-156, November.
    4. Rankin, N, 1986. "Debt Policy under Fixed and Flexible Prices," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 481-500, November.
    5. Martin Watts & Timothy Sharpe, 2013. "Immutable laws of debt dynamics," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 36(1), pages 59-84.
    6. Otaki, Masayuki, 2007. "The dynamically extended Keynesian cross and the welfare-improving fiscal policy," Economics Letters, Elsevier, vol. 96(1), pages 23-29, July.
    7. Otaki, Masayuki, 2009. "A welfare economics foundation for the full-employment policy," Economics Letters, Elsevier, vol. 102(1), pages 1-3, January.
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    More about this item

    Keywords

    full employment; debt-to-GDP ratio; continuous time debt dynamics;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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