Result

Abstract

The present monograph is concerned with the sustainability and optimality of public debt. The analysis has been conducted within the framework of neoclassical growth theory. Particularly it proves useful to consider the Solow model, the overlapping generations model and the infinite horizon model. Sustainability refers to the existence and the stability of the long-run equilibrium. Optimality relates to the path of public debt that maximizes discounted utility. The government is in control of three instruments: the government purchase ratio, the budget deficit ratio and the tax rate. For the time being let the purchase ratio be given exogenously. Then the government can follow either of two strategies, it fixes the deficit ratio or the tax rate. If the government fixes the deficit ratio, then according to the government budget constraint the tax rate will be endogenous. On the other hand, if the government fixes the tax rate, the deficit ratio will become endogenous.