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Running Primary Deficits Forever in a Dynamically Efficient Economy: Feasibility and Optimality

Author

Listed:
  • Andrew B. Abel
  • Stavros Panageas

Abstract

Government debt can be rolled over forever without primary surpluses in some stochastic economies, including some economies that are dynamically efficient. In an overlapping-generations model with constant growth rate, g, of labor-augmenting productivity, and with shocks to the durability of capital, we show that along a balanced growth path, the maximum sustainable ratio of bonds to capital is attained when the risk-free interest rate, r[sub]f, equals g. Furthermore, this maximal ratio maximizes utility per capita along a balanced growth path and ensures that the economy is dynamically efficient.

Suggested Citation

  • Andrew B. Abel & Stavros Panageas, 2022. "Running Primary Deficits Forever in a Dynamically Efficient Economy: Feasibility and Optimality," NBER Working Papers 30554, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30554
    Note: AP EFG PE
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    Cited by:

    1. Zhengyang Jiang & Hanno Lustig & Stijn Van Nieuwerburgh & Mindy Z. Xiaolan, 2024. "The U.S. Public Debt Valuation Puzzle," Econometrica, Econometric Society, vol. 92(4), pages 1309-1347, July.
    2. HIRAGUCHI Ryoji, 2023. "Optimal Government Debt Policy in the Overlapping Generations Model with Idiosyncratic Capital Return Risk," Discussion papers 23063, Research Institute of Economy, Trade and Industry (RIETI).
    3. Selahattin Imrohoroglu, 2023. "Mpk," CIGS Working Paper Series 24-002E, The Canon Institute for Global Studies.
    4. Gaetano Bloise & Pietro Reichlin, 2023. "Low safe interest rates: A case for dynamic inefficiency?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 633-656, December.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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