Debt to GDP Ratio from the Perspective of Functional Finance Theory and MMT

This paper will argue that since the ratio of government debt to GDP cannot diverge to infinity, fiscal collapse is not possible. Using a basic macroeconomic model in which the interest rate of government bonds is endogenously determined, with overlapping generations model in mind, we show the following results: 1) The budget deficit including interest payments on the government bonds equals an increase in the savings from a period to the next period. 2) If the savings in the first period is positive (unless the savings are made solely through stocks), we need budget deficit to maintain full employment under constant prices or inflation in the later periods. 3) Excess budget deficit induces inflation under full employment. 4) Under an appropriate assumption about the proportion of the savings consumed, the debt to GDP ratio converges to a finite value. It does not diverge to infinity