Open Access Journal Article

Don’t worry about the debt-GDP Ratio

by Yasuhito Tanaka a,* orcid
a
Faculty of Economics, Doshisha University, Kyoto, Japan
*
Author to whom correspondence should be addressed.
Received: 30 March 2023 / Accepted: 2 May 2023 / Published Online: 21 May 2023

Abstract

I will show that if the propensity to consume from savings satisfies appropriate conditions, the debt-GDP ratio will not grow infinitely large and fiscal collapse will not occur. Using a basic macroeconomic model, with an overlapping generations model in mind, we show the following results: 1) The budget deficit including interest payments on the government bonds equals an increase in the savings from a period to the next period. 2) If the savings in the first period is positive, we need budget deficit to maintain full employment under constant prices or inflation in the later periods. 3) Under an appropriate assumption about the propensity to consume from savings, the debt-GDP ratio converges to a finite value. It does not diverge to infinity. The larger the propensity to consume from savings, the smaller the budget deficit required to achieve full employment. The larger the propensity to consume from savings, the less likely it is that the debt-GDP ratio will become large.


Copyright: © 2023 by Tanaka. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

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ACS Style
Tanaka, Y. Don’t worry about the debt-GDP Ratio. Economic Analysis Letters, 2023, 2, 24. https://doi.org/10.58567/eal02020006
AMA Style
Tanaka Y. Don’t worry about the debt-GDP Ratio. Economic Analysis Letters; 2023, 2(2):24. https://doi.org/10.58567/eal02020006
Chicago/Turabian Style
Tanaka, Yasuhito 2023. "Don’t worry about the debt-GDP Ratio" Economic Analysis Letters 2, no.2:24. https://doi.org/10.58567/eal02020006
APA style
Tanaka, Y. (2023). Don’t worry about the debt-GDP Ratio. Economic Analysis Letters, 2(2), 24. https://doi.org/10.58567/eal02020006

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