Domar Debt Sustainability

The economist Evsey Domar in his pioneering work, "The Burden of Debt and National Income" (1944) carried out while he was a member of the Board of Governors of the US Federal Reserve System, offers answers to these questions. The paper centered on the discussion of the dynamics of public debt and economic growth, and it assessed the risks of public debt and emphasized the need to push economic growth rather than being skeptical about increase in public debt. The Domar condition states that for the public debt of a country to be sustainable, the nominal rate of growth of the economy should be greater than the growth rate of nominal public debt. As long as this condition is met, according to the Domar model, any level of public debt is sustainable, and the country remains solvent.

Domar (1944) argued that the ratio of public debt to GDP would be stable in the long run provided that the growth rate of GDP exceeds the effective interest rate on public debt.