The Overlapping Generations Model
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In this chapter we will analyse the growth effects of public debt in an overlapping generations model in the tradition of Diamond (1965). The basis model is presented in Blanchard and Fischer (1989). Public policy and welfare analysis in the overlapping generations model is described in Azariadis (1993) and in de la Croix and Michel (2002). In contrast to the Solow model, where a fixed saving ratio was assumed, the overlapping generations model derives the saving-ratio from intertemporal utility maximization of private agents within a finite horizon. The model has a long tradition for the analysis of public debt in neoclassical growth models. At first we have a look at the literature that assumes a fixed deficit ratio. Given a fixed deficit ratio, Carlberg (1984, 1985b, 1988) assumes that the government makes transfers. In contrast Michaelis (1989a) and Carlberg (1995) assume that the government either consumes or invests. As a result, in all the models of a fixed deficit ratio, there are two steady states if the deficit ratio stays below a critical level. However if the deficit ratio surpasses the critical level, then there is no steady state.
KeywordsInterest Rate Critical Level Output Growth Public Debt Budget Deficit
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