The Maximal Sustainable Public Debt in a Portfolio Balance and Global Version of the Diamond Overlapping Generations Model

Mark Andrew Roberts

Manchester School, 2017, vol. 85, issue S2, e75-e96

Abstract: Public debt is considered in a multi†country version of the Diamond OLG model with a focus on its maximal sustainable value. Imperfect asset substitutability gives rise to a further nonlinearity through a risk premium, and, if primary deficits are exogenous, it is an additional source of bifurcation maximum. The merits of this portfolio approach are (i) an analysis that can embrace the broad empirical pattern of relative rates of return, and (ii) the result that a large amount of public debt may reflect a persistently low demand for it, so that potential crises may emanate from the demand side of its market.

Date: 2017
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