Sustainability of Public Debt: Some Theoretical Considerations

14 Pages Posted: 3 Oct 2008 Last revised: 9 Jan 2013

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: September 10, 2008

Abstract

This paper starts from the observation that the primary surplus of the government must be financed out of a country's GDP. Assuming that the interest rate on public debt exceeds the growth rate of GDP, it is demonstrated that a sustainable debt policy is not compatible with a rising public debt to GDP ratio in the long-run. Further, if the primary surplus does not positively react to a rising debt to GDP ratio, a sustainable debt policy is excluded if the initial debt ratio exceeds a certain threshold. This holds independent of whether primary surpluses are set at their maximum values.

Keywords: Public Debt, Primary Surplus, Inter-temporal Budget Constraint, Sustainability

JEL Classification: H63

Suggested Citation

Greiner, Alfred, Sustainability of Public Debt: Some Theoretical Considerations (September 10, 2008). Available at SSRN: https://ssrn.com/abstract=1266042 or http://dx.doi.org/10.2139/ssrn.1266042

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

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