TITLE:
Limits to Public Debt in a Diamond-Type OLG Model of Involuntary Unemployment under Inflexible Aggregate Investment
AUTHORS:
Karl Farmer
KEYWORDS:
Limits to Public Debt, Diamond-Type OLG Model, Involuntary Unemployment, Inflexible Aggregate Investment
JOURNAL NAME:
Modern Economy,
Vol.13 No.11,
November
30,
2022
ABSTRACT: Governments in advanced countries are currently
striving to combat the disastrous economic effects of the shortage of energy
supply by providing generous public subsidies to households and firms. As a
result, the deficits of federal governments are further increasing after the
explosion of public debts due to SARS-CoV-2 related government expenditures and
collapsing tax revenues. Unemployment rates in many advanced countries while
recedingdue to extremely expansionary fiscal and monetary stances remain
significant. Thus, the question arises as to whether, in the face of
involuntary unemployment, limits to public debt can and/or ought to be
respected, or simply disregarded. It is the aim of this research to answer this
question within the scope of a Diamond-type overlapping generations (OLG) model
of involuntary unemployment under inflexible aggregated investment. It is found
that limits to public debt to output ratios exist; and their numerical values
are calculated. Moreover, a debt threshold pops up whereby larger public debt
diminishes output growth. In fact, the numerical value of the debt threshold is
found to be close to World Bank estimates.