TITLE:
Public Debt as a Burden on the Future Generation: A Keynesian Approach
AUTHORS:
Masayuki Otaki
KEYWORDS:
Redemption of Public Debt, Burden on the Future Generation, Balanced-Budget Multiplier, Keynesian Economics, Fiscal Discipline
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.5,
October
27,
2015
ABSTRACT: By using an overlapping
generations (OLG) model in the context of the production economy, this paper
shows that public debt lowers the future generation’s well-being even in the
situation of imperfect employment equilibrium. According to the dynamically
extended multiplier theory, which has a rigorous microeconomic foundation, the
effect of the redemption of public debt is equivalent to that of the
balanced-budget multiplier because the redemption increases autonomous spending
by old generation while the same amount of tax is levied on the young
generation. Thus, the aggregate disposable income remains before the issuance
since the value of the balanced-budget multiplier is unity. However, it is
evident that real GDP before tax reduction increases; it costs more resources
to earn the same disposable income. Therefore, it is unavoidable that the
issuance of public debt impairs the welfare of future generation even in a
Keynesian framework.