Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting

Abstract

Under the golden rule of public finance for public investment with a constant budget deficit/GDP ratio, we show that for the sustainability of government budget deficits there is a threshold of the initial public debt for a given stock of public capital, and that this threshold level of public debt is increasing in the stock of public capital. If the initial public debt is greater than the threshold, the government can no longer sustain budget deficits, while if it is smaller, the government can conduct a permanent deficit policy, which eventually leads to a positive public debt/GDP ratio.