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The Maximal Sustainable Public Debt in a Portfolio Balance and Global Version of the Diamond Overlapping Generations Model
Author(s) -
Roberts Mark Andrew
Publication year - 2017
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12208
Subject(s) - economics , portfolio , overlapping generations model , debt , imperfect , asset (computer security) , balance (ability) , monetary economics , capital asset pricing model , value (mathematics) , microeconomics , financial economics , macroeconomics , medicine , linguistics , philosophy , computer security , computer science , physical medicine and rehabilitation , machine learning
Public debt is considered in a multi‐country version of the Diamond OLG model with a focus on its maximal sustainable value. Imperfect asset substitutability gives rise to a further nonlinearity through a risk premium, and, if primary deficits are exogenous, it is an additional source of bifurcation maximum. The merits of this portfolio approach are (i) an analysis that can embrace the broad empirical pattern of relative rates of return, and (ii) the result that a large amount of public debt may reflect a persistently low demand for it, so that potential crises may emanate from the demand side of its market.