The Optimal Level of Debt in an OLG Model with Endogenous Fertility

Luca Spataro and Luciano Fanti

German Economic Review, 2011, vol. 12, issue 3, 351-369

Abstract: In the present work we extend Diamond’s OLG model by allowing for endogenous fertility and look at the consequences of such an extension on the rules for optimal public debt issuing. In particular, we show that the condition according to which the rate of growth of population should be higher than the interest rate is no longer sufficient for obtaining welfare improvements via debt increases and that the level of optimal debt is, ceteris paribus, lower than the one arising with exogenous fertility. Finally, a sensitivity analysis shows that the optimal level of debt is higher the lower the capital share, the higher individuals’ degree of patience, the bigger the child-rearing cost and the lower the preference for children. On policy grounds we argue that debt-tightening policies may be optimal in the long run provided that the cost of rearing children does not increase (or, if anything, does decrease).

Keywords: Overlapping generations; endogenous fertility; debt (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1111/j.1468-0475.2011.00534.x

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