Public Debt as Private Wealth: Some Equilibrium Considerations

27 Pages Posted: 13 Nov 2006

See all articles by Ekkehart Schlicht

Ekkehart Schlicht

University of Munich - Department of Economics; IZA Institute of Labor Economics

Abstract

Government bonds are interest-bearing assets. Increasing public debt increases wealth, income and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It distributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher private consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending and may rule out macroeconomic equilibrium. As an aside, a minor flaw in Domar's (American Economic Review, 34 (4), pp. 798-827) classical analysis is corrected.

Suggested Citation

Schlicht, Ekkehart, Public Debt as Private Wealth: Some Equilibrium Considerations. Metroeconomica, Vol. 57, No. 4, pp. 494-520, November 2006. Available at SSRN: https://ssrn.com/abstract=944270 or http://dx.doi.org/10.1111/j.1467-999X.2006.00253.x

Ekkehart Schlicht (Contact Author)

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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