Public Debt Places No Burden on Future Generations under Demand Shortage
26 Pages Posted: 27 Sep 2010 Last revised: 28 Sep 2010
Date Written: September 22, 2010
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.
Keywords: Demand shortage, Overlapping generations, Public debt, Unemployment, Welfare eﬀects
JEL Classification: E24, E62, H63
Suggested Citation: Suggested Citation