Department of Economics and Business Economics

Intergenerational conflict and public sector size and structure: A rationale for debt limits?

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How do budget rules influence the size and structure of the public sector? This question is considered in an overlapping generations political economy model. The different horizons of agents influence their voting behaviour and lead to excessive deficit financing and debt accumulation, reducing welfare of all subsequent generations. Along an equilibrium trajectory with increasing debt, the tax burden increases and public sector activities are crowded out due to the increasing costs of debt servicing. A debt ceiling may halt this process leading to less debt, more public consumption and higher welfare.

Original languageEnglish
JournalEuropean Journal of Political Economy
Pages (from-to)70-88
Number of pages19
Publication statusPublished - Mar 2019

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