Debt Issuance in an Infinite Horizon Economy

Let us investigate Ricardian debt neutrality in an infinite horizon economy. Suppose the government issues public debt in period 0 by b0 in order to finance government spending G0 and roll over the redemption forever. Namely, from period 1 onward, the government pays the interest payment of rb0 in each period but does not redeem b0. For simplicity, the government does not conduct any spending from period 1 onward and collects taxes to finance the interest payment, rb0, in each period. The government budget constraint in each period is given as

Thus, the present value of the future tax burden is given by

which is the same as the initial bond issuance. In other words, even if the government does not redeem the outstanding public debt, the present value of the future tax burden is equal to the present value of government spending. Thus, the Ricardian neutrality result holds in an infinite horizon economy as long as the private agent rationally recognizes the future tax burden correctly.

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