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GROWTH-MAXIMIZING PUBLIC DEBT UNDER CHANGING DEMOGRAPHICS

Published online by Cambridge University Press:  17 August 2015

Nikola Bokan ,
Andrew Hughes Hallett  and
Svend E. Hougaard Jensen
Nikola Bokan
Affiliation:
Croatian National Bank
Andrew Hughes Hallett
Affiliation:
George Mason University
Svend E. Hougaard Jensen*
Affiliation:
Copenhagen Business School
*
Address correspondence to: Svend E. Hougaard Jensen, Department of Economics, Copenhagen Business School, Porcelaenshaven 16A, DK-2000 Frederiksberg, Denmark; e-mail: shj.eco@cbs.dk.
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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.

Keywords

Fiscal RulesPublic DebtDemographic Changes
Type
Notes
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1640 - 1651
Copyright
Copyright © Cambridge University Press 2015 

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