Running Primary Deficits Forever in a Dynamically Efficient Economy: Feasibility and Optimality

Andrew Abel and Stavros Panageas

No 30554, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Government debt can be rolled over forever without primary surpluses in some stochastic economies, including some economies that are dynamically efficient. In an overlapping-generations model with constant growth rate, g, of labor-augmenting productivity, and with shocks to the durability of capital, we show that along a balanced growth path, the maximum sustainable ratio of bonds to capital is attained when the risk-free interest rate, r[sub]f, equals g. Furthermore, this maximal ratio maximizes utility per capita along a balanced growth path and ensures that the economy is dynamically efficient.

JEL-codes: E0 E6 H60 (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-dge, nep-gro and nep-upt
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