Author(s)

Karl Farmer^1,2

¹University of Graz, Graz, Austria.
²University Cluj-Napoca, Cluj-Napoca, Romania.

Governments in advanced countries are currently striving to combat the disastrous economic effects of the shortage of energy supply by providing generous public subsidies to households and firms. As a result, the deficits of federal governments are further increasing after the explosion of public debts due to SARS-CoV-2 related government expenditures and collapsing tax revenues. Unemployment rates in many advanced countries while recedingdue to extremely expansionary fiscal and monetary stances remain significant. Thus, the question arises as to whether, in the face of involuntary unemployment, limits to public debt can and/or ought to be respected, or simply disregarded. It is the aim of this research to answer this question within the scope of a Diamond-type overlapping generations (OLG) model of involuntary unemployment under inflexible aggregated investment. It is found that limits to public debt to output ratios exist; and their numerical values are calculated. Moreover, a debt threshold pops up whereby larger public debt diminishes output growth. In fact, the numerical value of the debt threshold is found to be close to World Bank estimates.

Limits to Public Debt, Diamond-Type OLG Model, Involuntary Unemployment, Inflexible Aggregate Investment

Farmer, K. (2022) Limits to Public Debt in a Diamond-Type OLG Model of Involuntary Unemployment under Inflexible Aggregate Investment. Modern Economy, 13, 1488-1507. doi: 10.4236/me.2022.1311080.