The sustainability of government financial policies in overlapping-generations models

Abstract

The objective of this thesis is to examine the implications of different government financial policies on the real sector of the economy. For this purpose we develop two overlapping-generations models. The first one allows us to evaluate the performance of the economy when debt is managed with different types of financial assets. A general result of the analysis is shown to be that an increase in the burden of debt leads to crowding out of the capital stock. A criterion for deriving endogenously the maximum sustainable level of debt within the model is also identified. The model turns out to be useful to provide an explanation of the poverty trap which is a very common phenomenon in some developing countries. The second model is developed to discuss the effects on the real economic variables of two different government deficit financing policies. The framework is an overlapping-generations monetary economy with population growth. Firstly, we analyse the effects of public deficit financing policy by injection of money into the economy at an exogenous constant rate and we emphasise the Mundell-Tobin (or non-superneutrality of money). Secondly, we extend the previous financing policy to include an endogenised money growth rate and we succeed in providing a powerful framework to explain the conditions under which dynamics of hyperinflation may arise. The novelty and importance of the findings are highlighted throughout the thesis