Public Debt as a Burden on the Future Generation: A Keynesian Approach

Abstract

By using an overlapping generations (OLG) model in the context of the production economy, this paper shows that public debt lowers the future generation’s well-being even in the situation of imperfect employment equilibrium. According to the dynamically extended multiplier theory, which has a rigorous microeconomic foundation, the effect of the redemption of public debt is equivalent to that of the balanced-budget multiplier because the redemption increases autonomous spending by old generation while the same amount of tax is levied on the young generation. Thus, the aggregate disposable income remains before the issuance since the value of the balanced-budget multiplier is unity. However, it is evident that real GDP before tax reduction increases; it costs more resources to earn the same disposable income. Therefore, it is unavoidable that the issuance of public debt impairs the welfare of future generation even in a Keynesian framework.