Involuntary unemployment and sustainability of bond-financed fiscal deficit

We analyze the link between the sustainability of bond-financed deficit policy and involuntary unemployment in an overlapping generations model incorporating the fair wage hypothesis. If the fiscal deficit policy is sustainable, reductions in bond-financed deficit increase per worker capital stock and lower the unemployment rate in the long term, though the policy will raise the unemployment rate in the short term. When population growth is sufficiently low and/or per worker public debt is sufficiently large, population aging will not only increase per worker public debt but also raise the unemployment rate, thereby running counter to the bond-financed deficit cut policy.