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Welfare-improving debt policy under monopolistic competition. (English) Zbl 1009.91045

Summary: We analyse the effects of debt policy in an overlapping generations model with monopolistic competition. Debt crowds out capital and raises interest rates but unlike competitive models this is welfare-improving for all generations if the elasticities of substitution in production are low. In a non-competitive model, the social marginal product of capital could be negative while the rate of interest exceeds the population growth rate (the latter two are non-negative), and profits exceed investment.

MSC:

91B40 Labor market, contracts (MSC2010)
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