Sustainable Public Debt, Credit Constraints, and Social Welfare

Real Arai and Takuma Kunieda

No 732, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Whether the sustainability of public debt is promoted or foiled by credit market imperfections depends upon the fiscal policy rules. Under the golden rule, as credit constraints dissipate, public debt is more likely sustainable, whereas under the balanced budget rule, it is less likely sustainable. We also examine the social welfare under the two different fiscal rules. The balanced budget rule is more beneficial to the super-near future generations than the golden rule, whereas the golden rule is more beneficial to the near future generations than the balanced budget rule. However, to the far future generations, the balanced budget rule once again becomes more beneficial than the golden rule.

Keywords: Fiscal sustainability; credit constraints; social welfare; heterogeneous agents endogenous growth (search for similar items in EconPapers)
JEL-codes: E63 O40 (search for similar items in EconPapers)
Pages: 44pages
Date: 2010-10
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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