2006] “Public Debt as Private Wealth: Some Equilibrium Considerations.” Metroeconomica

ABSTRACT. Government bonds are interest-bearing assets. Increasing public debt increases wealth, income, and consumption demand. The smaller government ex-penditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It dis-tributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher private consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending and may rule out macroeconomic equilibrium. As an aside, a minor flaw in Domar’s(1944) classical analysis is corrected