r = n

In this case, Eq. (6.19) reduces to

a The dynamics of the Domar condition. r > n

Fig. 6.4a The dynamics of the Domar condition. r > n

Fig. 6.4b The dynamics of the Domar condition. r < n

If g > t, the government budget is unsustainable and vice versa. This clarifies the importance of the sign of g — t. If the primary balance is exogenously given, the government budget goes bankrupt in the case of primary deficit, g — t > 0.

However, the government intends to conduct consolidation measures to reduce the primary deficit if b is very high. Thus, the primary deficit, P = g -1, may well be a function of b.

If P decreases with b, the budget constraint may be sustainable even in the region of P > 0. This condition, P0(b) < 0, is called the Bohn condition. If r — n is fixed at any value, the same argument holds. In such an instance, the condition for maintaining sustainability is given as P0 + r — n < 0. The absolute value of P0 should be greater than r — n (see Bohn 1995).

As explained in Fig. 6.5, if the P(b) curve is downward sloping and intersects theAb = 0 line at point E, E becomes a stable equilibrium point. Even if b is initially very high, b declines to the equilibrium level at point E gradually.

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