 Debt to GDP Ratio from the Perspective of MMT with a Simple Microeconomic FoundationJournal of Social Science Studies, 2022, vol. 9, issue 2, 1 Abstract: This paper will argue that since the ratio of government debt to GDP cannot diverge to infinity, fiscal collapse is not possible. Using a macroeconomic model of a growing economy with a simple microeconomic foundation about consumers’ behavior, with overlapping generations model in mind, we show the following results- 1) The budget deficit including interest payments on the government bonds equals an increase in the savings from a period to the next period. 2) If the savings in the first period is positive (unless the savings are made solely through stocks), we need budget deficit to maintain full employment under constant prices or inflation in the later periods in a growing economy. 3) Excess budget deficit induces inflation under full employment. 4) Under an appropriate assumption about the propensity to consume, the debt to GDP ratio converges to a finite value. It does not diverge to infinity. 5) In the case of balanced budget excluding interest payments, if an appropriate weak assumption about the propensity to consume holds, the debt to GDP ratio cannot diverge to infinity. 6) When the propensity to consume is small, we need budget deficit, not budget surplus, to prevent the debt to GDP ratio to diverge infinity. Date: 2022 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:mth:jsss88:v:9:y:2022:i:2:p:1 Access Statistics for this article Journal of Social Science Studies is currently edited by John Smith More articles in Journal of Social Science Studies from Macrothink Institute |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.