Public debt, secular stagnation, and functional finance

Peter Skott

No 2015-12, UMASS Amherst Economics Working Papers from University of Massachusetts Amherst, Department of Economics

Abstract: Fiscal policy and public debt may be required to maintain full employment and avoid secular stagnation. This conclusion emerges from a range of different models, including OLG specifications and stock-flow consistent (post-) Keynesian models. One of the determinants of the required long-run debt ratio is the rate of economic growth. Low growth leads to high debt, and empirical correlations between growth and debt may reflect this causal effect of growth on debt, rather than negative effects of debt on growth. A second result relates directly to austerity policies. The level of government consumption and the structure of taxation influence the required debt ratio and, paradoxically, austerity policies are counterproductive on their own terms: cuts in government consumption lead to an increase in the required level of debt.

Keywords: functional finance; zero lower bound; liquidity trap; fiscal policy; secular stagnation; austerity; public debt. (search for similar items in EconPapers)
JEL-codes: E22 E62 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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