Maximum Sustainable Government Debt in the Overlapping Generations Model

Neil Rankin and Barbara Roffia

No 2076, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The theoretical determinants of maximum sustainable government debt are investigated using Diamond's overlapping-generations model. A level of debt is defined to be 'sustainable' if a steady state with non-degenerate values of economic variables exists. We show that a maximum sustainable level of debt almost always exists. Most interestingly, it normally occurs at a 'catastrophe' rather than a 'degeneracy', i.e. where variables such as capital and consumption are in the interiors, rather than at the limits, of their economically meaningful ranges. This means that if debt is increased step by step, the economy may suddenly collapse without obvious warning.

Keywords: catastrophes; maximum sustainable government debt; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: E62 H63 (search for similar items in EconPapers)
Date: 1999-02
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Maximum Sustainable Government Debt in the Overlapping Generations Model (2003)
Working Paper: Maximum Sustainable Government Debt in the Overlapping Generations Model (1999)
Working Paper: Maximum Sustainable Government Debt in the Overlapping Generations Model
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