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Volkswirtschaft - Open Access LMU - Teil 01/03 Podcast
Public Debt as Private Wealth

Public Debt as Private Wealth

Volkswirtschaft - Open Access LMU - Teil 01/03 vor 22 Jahren

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Government bonds are interest-bearing assets. Increasing public
debt increases income, wealth, and consumption demand. The smaller
government expenditure is, the larger consumption demand must be in
equilibrium, and the larger must be public debt. Conversely, lower
public debt implies higher government spending and taxation. Public
debt plays, thus, an important role in establishing equilibrium. It
distributes output between consumers and government. In case of
insufficient demand, a larger public debt entails higher
consumption and less public spending. If upper bounds on public
debt are introduced (as in the Maastricht treaty), such constraints
place lower bounds on taxation and public spending or may even rule
out the existence of macroeconomic equilibrium altogether.
Domar(1944) and Gehrels(1957) have discussed similar issues in an
unemployment setting. In contrast, this note considers the full
employment case and looks at adjustments in debt, taxes and
government spending that preserve full employment. The explicit
modelling of some adjustment processes that have not been
considered in the earlier contributions leads to somewhat different
and, in a sense, more "debt-friendly" results.