ON THE SUSTAINABILITY OF GOVERNMENT BORROWING IN A DYNAMIC GENERAL EQUILIBRIUM

Abstract.  This paper constructs a dynamic general equilibrium model with money in consumers' utility functions and investigates the equilibrium dynamics of government's debt. The limitation level of the government borrowing for which a dynamic equilibrium and the no Ponzi Game condition are compatible with each other is explicitly derived. The critical level depends on the long-run interest rate, primary balance, money supply etc.