Public Debt Accumulation and Fiscal Consolidation

Kazumasa Oguro and Motohiro Sato

No 517, CIS Discussion paper series from Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University

Abstract: In this paper, we analyze the relationship between interest rates on government bonds (GB) and fiscal consolidation rule by using an overlapping generation model with endogenous and stochastic growth settings. Our key findings are summarized as follows. First, interest rates of GB may be declining as public debt accumulates relative to private capital, as opposed to the conventional view that buildup of public debt accompanies a rise in interest rates. Second, fiscal consolidation rule plays a key role in determining interest rates in equilibrium. Third, the economy may exhibit discrete changes with interest rates diverging, implying that our observation of relatively low GB interest rates does not assure the continuation of that trend in the future. Fourth, a preventive tax increase to contain public debt at sustainable levels will not gain the political support of existing generations, whose life span is limited. Citizens prefer to shift the ultimate burden of public debt to future generations.

Keywords: Overlapping generation model; interest rate on government bond; fiscal consolidation rule; default risk (search for similar items in EconPapers)
JEL-codes: E17 E62 H30 H5 H60 H63 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2011-05
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/19282/pie_dp517.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hit:cisdps:517

Access Statistics for this paper

More papers in CIS Discussion paper series from Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University Contact information at EDIRC.
Bibliographic data for series maintained by Digital Resources Section, Hitotsubashi University Library ().