Public Debt Places No Burden on Future Generations under Demand Shortage

Abstract:     
In a Diamond-type overlapping-generations setting public debt issuance places no burden on future generations including those who repay the debt if prices and wages are fixed and unemployment occurs in the periods in which public bonds are issued and repaid. Whether the collected fund is spent on government purchases or transfers to the present generation, public bond issuance stimulates aggregate demand and creates additional employment of future generations, which yields additional income that is large enough to cover their tax burden. This property is true whether the debt is repaid by children or grandchildren.

Number of Pages in PDF File: 26

Keywords: Demand shortage, Overlapping generations, Public debt, Unemployment, Welfare effects

JEL Classification: E24, E62, H63

working papers series