This is the latest version of this item.
Abstract
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. The final version is available at https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-999X.2006.00253.x
Item Type: | Journal article |
---|---|
Keywords: | stabilization policy; government debt; public debt; functional finance; Maastricht treaty; Ricardian equivalence; functional finance |
Faculties: | Economics Economics > Munich Discussion Papers in Economics Economics > Munich Discussion Papers in Economics > Macro-Economics Economics > Munich Discussion Papers in Economics > Public Finance Economics > Chairs > Chair of Institutional Economics (closed) |
Subjects: | 300 Social sciences > 300 Social sciences, sociology and anthropology 300 Social sciences > 330 Economics |
JEL Classification: | E2, E12, E6, H6 |
URN: | urn:nbn:de:bvb:19-epub-2143-5 |
Language: | English |
Item ID: | 2143 |
Date Deposited: | 28. Feb 2008, 12:19 |
Last Modified: | 05. Jan 2024, 12:48 |
References: | Barro,R.J.(1974). Are government bonds real net wealth? Journal of Political Economy, 82(6) :1095–1117. Barro,R.J.(1979). On the determination of the public debt. The Journal of Political Economy, 87(5/1): 940–71. Barro,R.J.(1989). The Ricardian approach to budget deficits. The Journal of Economic Perspectives, 3(2):37–54. Berben,R.-P. and Brosens,T.(2005). The impact of government debt on private consumption in OECD countries. TechnicalReport 45, De Nederlandsche Bank. On line at http://www.dnb.nl/dnb/bin/doc/Working%20Paper%20No.%2045-2005_tcm13-57159.pdf. Blinder,A.S. and Solow,R.M.(1974). Analytical foundations of fiscal policy. In Gordon,K., editor, The Economics of Public Finance, pages3–115. WashingtonD.C.: The Brookings Institution. Branson,W.H.(1989). Macroeconomic Theory and Policy. New York: HarperandRow, 3 edition. Clower,R.W. and Johnson,M.B.(1968). Income, wealth, and the theory of consumption. InWolfe,J.N., editor, Value, Capital, and Growth. Papers in honour of Sir John Hicks, pages 45–96. Edinburgh University Press. Domar,E.D.(1944). The ’burden of the debt’ and the national income. American Economic Review, 34(4):798–827. Gehrels,F.(1957a). Factorsubstitution, consumerwealth, and growth stability. The American Economic Review, 47(5):625–33. Gehrels,F.(1957b). Government debt as a generator of economic growth. The Review of Economics and Statistics, 39(2):183–92. Keynes,J.M.(1936). The General Theory of Employment, Interest, and Money. Harcourt, Brace and World. Modigliani,F. and Brumberg,R.(1954). Utility analysis and the consumption function. In Kurihara,K., editor, Post-Keynesian Economics, pages 388–436. Rutgers University Press. Pigou,A.C.(1947). Economic progress in a stable environment. Economica, 14(55):180–88. Woodford,M.(1998). Public debt and the price level. Bank of England Conference on Government Debt and Monetary Policy, Online at www.princeton.edu/~woodford/BOE.pdf. |
Available Versions of this Item
-
Public Debt as Private Wealth. (deposited 13. Apr 2005)
- Public Debt as Private Wealth. (deposited 28. Feb 2008, 12:19) [Currently Displayed]