PUBLIC DEBT AS PRIVATE WEALTH: SOME EQUILIBRIUM CONSIDERATIONS
Ekkehart Schlicht ()
Metroeconomica, 2006, vol. 57, issue 4, pages 494-520
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. Copyright © 2006 The Author; Journal compilation © 2006 Blackwell Publishing Ltd.
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