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PUBLIC DEBT IN A POLITICAL ECONOMY

Published online by Cambridge University Press:  15 June 2016

Sigrid Röhrs
Sigrid Röhrs*
Affiliation:
Goethe-University Frankfurt
*
Address correspondence to: Sigrid Röhrs, Department of Money and Macroeconomics, Goethe-University Frankfurt, Office HOF 3.52, Grüneburgplatz 1, D-60323 Frankfurt am Main, Germany; e-mail: Sigrid.Roehrs@hof.uni-frankfurt.de.
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Abstract

This paper analyzes the determination of public debt in a dynamic politico-economic model with overlapping generations. Sizeable levels of public debt can be rationalized in this model. The elasticity of substitution between public and private consumption determines the size of public debt and could explain differences of debt across countries. I compare the optimal policies under commitment and in a “political equilibrium” without commitment. Public debt can be higher or lower when commitment is absent, depending on the elasticity of substitution between public and private consumption. Consequently, under certain conditions, the no-commitment debt level can be closer to a normative benchmark with higher weight for future generations.

Keywords

Government DebtFiscal PolicyPolitical EconomyMarkov Equilibrium
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1282 - 1312
Copyright
Copyright © Cambridge University Press 2016 

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