On the Determination of the Public Debt

ing for convenience from price-level changes, suppose now that the current rate of return on the one-period government debt, r, differs from that applicable in the previous period, r(1. It is assumed that anticipated rates of return for future periods are still equal to the current rate, r. In the case of the one-period debt that is being considered, the government's budget condition of equation (1) is now modified to G1 + rub11 = T1 + (bl -be, Gt + rb,1 = T1 + (bt bt-1), t-2 . . . 2 (1''') where the b's refer throughout to the real par (initial) value of debt. These conditions can be shown to imply that the overall budget constraint is altered from the form of equation (3) to [GIl( + r)t] + b'(1 + r1)/(1 + r) -Yrl(1 + r)']. (3T)