On the (de)stabilizing effect of public debt in a Ramsey model with heterogeneous agents. (March 2015)

• Record Type: Journal Article
• Authors: Nishimura, Kazuo; Nourry, Carine; Seegmuller, Thomas; Venditti, Alain
• Is Part Of: International journal of economic theory. Volume 11:Number 1(2015:Mar.)
• Page Start: 7
• Page End: 24
• Publication Date: 2015-03
• Subjects: Economics -- Periodicals; 330.01
• DOI: 10.1111/ijet.12049
• Languages: English
• ISSNs: 1742-7355

Abstract

<abstract abstract-type="main" xml:lang="en"> <title>Abstract</title> <sec id="ijet12049-sec-0001" sec-type="section"> <p>We introduce public debt in a Ramsey model with heterogeneous agents and a public spending externality affecting utility which is financed by income tax and public debt. We show that public debt considered as a fixed portion of GDP can have a stabilizing or destabilizing effect, depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital–labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic fluctuations. However, when the public spending externality and the elasticity of capital–labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent fluctuations without debt.</p> </sec> </abstract>