Public Debt Dynamics in a Monetary Economy of Production

Abstract

This paper investigates the determinants and stability conditions of the public debt-to-GDP ratio within a theoretical framework representing the main characteristics of a monetary economy of production. To this end, we develop a dynamic Stock-Flow Consistent (SFC) model based on the Supermultiplier approach, incorporating both bank and fiat money, capital accumulation and endogenous public debt service. Steady-state values are derived, and stability is assessed through both analytical and simulation-based approaches. Our main findings show that the public debt-to-GDP ratio is positively influenced by the saving rate and negatively influenced by the growth rate of autonomous demand components and the capital intensity of the economy. The effects of the interest rate and tax rate are found to be non-linear, depending on the growth regime emerging in the economy. Under the “standard-regime”, the tax rate has a negative impact, while the impact of the policy rate is positive. Given the exogenous parameters, and under the stability conditions, there exists a long-run level of public debt-to-GDP ratio toward which the economy converges. These results challenge the rationale for applying blanket regulations on public budgets, disregarding the distinct traits of each economic system.