Abstract
Abstract The aim of the paper is to show, using a simple two-period overlapping generations model in which goods are produced solely by labour in a monopolistically competitive industry, that a continuous budget deficit (including the interest payments on government bonds) is necessary to achieve and maintain full employment under economic growth driven by technological progress. Since the budget deficits must be continuous, it might be better if they were financed by seigniorage rather than government debt. Since the budget deficit due to the issuance of government bonds puts pressure on fiscal expenditures in the amount of interest payments, a budget deficit of the same size due to seigniorage is a more effective use of the budget. It will also be shown that to achieve full employment from a recession with involuntary unemployment the extra budget deficit is necessary.
Highlights
The accumulation of government debt has become a problem in many countries in recent years, this paper argues that the accumulation of government debt is an inevitable and natural phenomenon in a growing economy and should not be considered a problem.Using a simple two-period overlapping generations model in which goods are produced solely by labour in a monopolistically competitive industry, the author will show that a continuous budget deficit is necessary to achieve and maintain full employment under economic growth driven by technological progress
Continuous budget deficit including interest payments on the government bonds is necessary to achieve and maintain full employment when the economy grows at the positive rate by technological progress
Since the budget deficits must be continuous, it might be better if they were financed by seigniorage rather than government debt
Summary
The accumulation of government debt has become a problem in many countries in recent years, this paper argues that the accumulation of government debt is an inevitable and natural phenomenon in a growing economy and should not be considered a problem. Using a simple two-period overlapping generations model in which goods are produced solely by labour in a monopolistically competitive industry, the author will show that a continuous budget deficit (including the interest payments on government bonds) is necessary to achieve and maintain full employment under economic growth driven by technological progress. Otaki & Tamura (2013), using an endogenous growth model with cost reducing investment, states that the budget deficit is necessary for economic growth, and the debt-to-GDP ratio increases because cost reducing investment reduces labour demand under monopolistic competition. He seems to believe that the government debt must be paid off with taxes. In Appendix, the author presents calculations about utility maximization of consumers and fiscal spending by the government
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