GROWTH-MAXIMIZING PUBLIC DEBT UNDER CHANGING DEMOGRAPHICS

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 parame...

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Bibliographic Details
Published in:Macroeconomic dynamics 2016-09, Vol.20 (6), p.1640-1651
Main Authors: Bokan, Nikola, Hallett, Andrew Hughes, Hougaard Jensen, Svend E.
Format: Article
Language:English
Subjects:
Age
Aging
Budgets
Capital stock
Deficit financing
Demographics
Economic development
Economic growth
Economic theory
Fiscal policy
Labor productivity
Macroeconomics
Population
Retirement
Sovereign debt
Studies
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Summary: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.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100514000947