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The constraint on public debt when r < g but g < m

Reis, Ricardo (2021) The constraint on public debt when r < g but g < m. BIS Working Papers (939). Bank for International Settlements, Basel, CH.

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Abstract

With real interest rates below the growth rate of the economy, but the marginal product of capital above it, the public debt can be lower than the present value of primary surpluses because of a bubble premia on the debt. The government can run a deficit forever. In a model that endogenizes the bubble premium as arising from the safety and liquidity of public debt, more government spending requires a larger bubble premium, but because people want to hold less debt, there is an upper limit on spending. Inflation reduces the fiscal space, financial repression increases it, and redistribution of wealth or income taxation have an unconventional effect on fiscal capacity through the bubble premium.

Item Type: Monograph (Working Paper)
Official URL: https://www.bis.org/wpapers/index.htm
Additional Information: © 2021 Bank for International Settlements
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
G - Financial Economics > G1 - General Financial Markets > G10 - General
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
Date Deposited: 25 May 2021 09:00
Last Modified: 25 May 2021 09:00
URI: http://eprints.lse.ac.uk/id/eprint/110713

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