Public Debt Reduction in Advanced Countries and Its Impacts on Emerging Countries

Karl Farmer and Matthias Schelnast ()
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Matthias Schelnast: University of Graz

Chapter 15 in Growth and International Trade, 2013, pp 333-360 from Springer

Abstract: Abstract Financial crises associated with banking crises leave heavy fiscal legacies. For the USA e.g. an increase in the gross government debt to GDP ratio towards more than 100 % is predicted by 2012. Due to its unsustainability a significant reduction of public debt in the USA and in other advanced countries seems to be indispensable. However, as shown in this paper, the long run welfare effects of debt reduction in advanced countries at home as well as on emerging countries are not in accordance with debt reduction necessities. In particular, we show that domestic and foreign welfare decrease when the domestic country (USA) reduces public debt, given that this country has a negative external balance and a lower capital production share than the other country (China) and that dynamic inefficiency holds.

Keywords: Real Exchange Rate; Public Debt; Saving Rate; Welfare Effect; Dynamic Efficiency (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/978-3-642-33669-0_15

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