Involuntary Unemployment, Inflexible Aggregate Investment, and Limits to Public Debt

It is the aim concerning this chapter to explore the question of whether limits to public debt live in a “Old-Keynesian”-like intertemporal equilibrium model of automatic unemployment. As well-known, skilled is still no consensus with macro-economists about the accepted equilibrium foundations of Keynes’ [1] idea of involuntary inaction in a perfectly functioning market frugality. While macro-economists concur that involuntary inaction is traced back to a lack of aggregate demand (aggregate demand failures), they are still detached about the reasons for aggregate demand remaining beneath full-employment crop. A majority fastening to the New Keynesian approach of micro-organized, dynamic general balance models refers aggregate demand failures back to gummy prices sluggishly adapting to advertise imbalances due to adaptation costs and imperfect competition (for a survey of former contributions Dixon [2] and for the more current dynamic assumed general equilibrium (DSGE) models [3], and Woodford [4]). A youth of general-balance oriented macro-economists trace aggregate demand bankruptcies back to inflexible aggregate financing which does not indifferently adapt to aggregate savings in spite of prices clear perfectly competing markets [5] and Magnani [6]. While Magnani [6] incorporated inflexible aggregate grant in Solow’s [7] growth model, in this place chapter automatic unemployment and inflexible aggregate expense are modeled in a Diamond [8]-type coinciding generations (OLG) economy accompanying production, tangible and human capital accumulation and money owed by country in line with Farmer and Kuplen [9] and Farmer [10]. This model is used to investigate the question of either in the face of automatic unemployment, limits to public debt can and/or should be respected, or completely disregarded. It is raise that limits to public debt to output percentages exist; and their mathematical values are calculated. Moreover, a obligation threshold show up whereby best public debt diminishes gain growth. In fact, the mathematical value of the debt opening is found expected close to World Bank estimates. While these results are cheering, the problem of micro-bedrocks for inflexible aggregate loan remains open. Two promising approaches to answer this problem are soon reviewed at the end.

Author(s) Details:

Karl Farmer,
Department of Economics, University of Graz, Universitaetsstrasse 15/F4, A-8010 Graz, Austria and University Cluj-Napoca, Cluj-Napoca, Romania.

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Keywords: Involuntary unemployment, inflexible aggregate investment, Diamond-type OLG model, limits to public debt

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