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Debt Policy in a Competitive Two-Sector Overlapping Generations Model

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  • Partha Sen

    (Delhi School of Economics)

Abstract

We analyse debt policy in a two-period, two-sector overlapping generations model with Leontief technologies. We find that debt, issued to transfer resources to the initially old, could be welfare improving in the new steady state for an economy which satisfies the usual conditions for dynamic efficiency viz. the rate of interest is at least as great as the population growth rate. Out of steady state, the only potential losers are the recipients of the transfer. This could happen if the interest rate were to fall sufficiently to offset the effect of the transfer. From generation one onwards everyone becomes better off (under reasonable asumptions). Contrast this with a one-sector model where the definite gainers are those who are alive on date one.

Suggested Citation

  • Partha Sen, 2005. "Debt Policy in a Competitive Two-Sector Overlapping Generations Model," Working papers 137, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:137
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    References listed on IDEAS

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    1. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(1), pages 1-19.
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    More about this item

    Keywords

    Government Debt; Overlapping Generations; Two-Sector Models; Dynamic Efficiency.;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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