Growth-maximizing public debt under changing demographics

Nikola Bokan, Andrew Hughes Hallett, Svend E. Hougaard Jensen

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    This paper develops an overlapping-generations model to study the growth-maximizing level of public debt under conditions of demograhic change. It is shown that the optimal debt level depends on a positive marginal productivity of public capital. In general, it also depends on the demographic parameters, but not if the government is not allowed to borrow to cover revenue shortfalls for current age-related spending. In that context, balanced budget rules are not an approriate form of fiscal rule. The implication is that a government facing demograhic change or demands for more welfare spending will have to adjust its fiscal plans to accommodate those changes, most likely downward, if growth is to be preserved. An advantage of this model is that it allows us to determine in advance the way in which fiscal policies need to adjust as demographic parameters change.
    Original languageEnglish
    Pages (from-to)1640-1651
    Number of pages12
    JournalMacroeconomic Dynamics
    Volume20
    Issue number6
    Early online date17 Aug 2015
    DOIs
    Publication statusPublished - Sept 2016

    Keywords

    • Fiscal rules
    • Public debt
    • Demographic changes

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