Foreign vs. domestic public debt and the composition of government expenditure: A political-economy approach

Philipp Harms and Joachim Lutz ()
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Joachim Lutz: Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany

No 1415, Working Papers from Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz

Abstract: We consider an economy in which a political-support maximizing government takes into account different generations' preferences when deciding how much to borrow abroad and how much to spend on public consumption and investment. We show that, in equilibrium, the government's choices are shaped by three parameters: the effect of government spending on output, the expected output costs of a default, and the relative political weight of the generations currently alive. We conclude that the joint dependence on these parameters establishes a strong, but non-linear relationship between the share of foreign debt in total public debt and the share of investment in total government spending.

Pages: 24 pages
Date: 2014-11-20, Revised 2014-11-20
New Economics Papers: this item is included in nep-pbe and nep-pol
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https://download.uni-mainz.de/RePEc/pdf/Discussion_Paper_1415.pdf First version, 2014 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:jgu:wpaper:1415

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