Government Debt, Capital Accumulation, and the Terms of Trade in a Model of Interdependent Economies

Howell Zee

Economic Inquiry, 1987, vol. 25, issue 4, 599-618

Abstract: This paper extends P. Diamond's overlapping generations model into a two-good, two-country setting to analyze the impact of an increase in domestic government debt on the terms of trade, the current account, and capital accumulation at home and abroad. It is found that while the direction of change in the terms o f trade is indeterminate in the short run, for stability it must agr ee with that in the steady state, which in turn is dependent on the i nitial debt status in trade of the home country. However, the higher level of government debt leads unambigously to lower levels of capita l stocks. Copyright 1987 by Oxford University Press.

Date: 1987
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