Maximum Sustainable Government Debt in the Overlapping Generations Model

Centre for Economic Policy Research Discussion Paper Series No. 2076

Posted: 13 Apr 1999

See all articles by Neil Rankin

Neil Rankin

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR)

Barbara Roffia

European Central Bank (ECB)

Date Written: February 1999

Abstract

The theoretical determinants of maximum sustainable government debt are investigated using Diamond's overlapping-generations model. A level of debt is defined to be 'sustainable' if a steady state with non-degenerate values of economic variables exists. We show that a maximum sustainable level of debt almost always exists. Most interestingly, it normally occurs at a 'catastrophe' rather than a 'degeneracy', i.e. where variables such as capital and consumption are in the interiors, rather than at the limits, of their economically meaningful ranges. This means that if debt is increased step by step, the economy may suddenly collapse without obvious warning.

JEL Classification: E62, H63

Suggested Citation

Rankin, Neil and Roffia, Barbara, Maximum Sustainable Government Debt in the Overlapping Generations Model (February 1999). Centre for Economic Policy Research Discussion Paper Series No. 2076, Available at SSRN: https://ssrn.com/abstract=154676

Neil Rankin (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
(44 1203) 523 470 (Phone)
(44 1203) 523 032 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Barbara Roffia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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