Public debt in an OLG model with imperfect competition: Long-run effects of austerity programs and changes in the growth rate

In this paper we consider a modified version of Diamond's OLG model. We show, first, that dynamic inefficiency may be relevant when the presence of imperfect competition is taken into account. Second, if fiscal policy is used to avoid inefficiency and maintain an optimal capital intensity, the required debt ratio will be inversely related to the growth rate. Third, austerity policies - reductions in government consumption and entitlement programs for the old generation - raise the required debt ratio.