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

Karl Farmer () and Matthias Schelnast

International Advances in Economic Research, 2013, vol. 19, issue 2, 167-188

Abstract: Financial crises accompanied by banking crises often entail heavy fiscal legacies. For the U.S., for example, the gross government debt to GDP ratio exceeded 100 % in 2012. Due to the unsustainability of public debt, both in the U.S. and in other advanced countries, moves towards a substantial reduction in debt levels would appear to be unavoidable. However, as shown in this paper, the long-run welfare impact of debt reduction in advanced countries, both at home and abroad, may prove to be somewhat of a disincentive for policy makers. In particular, we find that under conditions of dynamic inefficiency, and when Home (U.S.) has a negative external balance and a lower capital production share than Foreign (China), both domestic and foreign welfare decrease if Home reduces public debt. Copyright International Atlantic Economic Society 2013

Keywords: External balance; Capital production share; Public debt; Real exchange rate; Two-country OLG model; Welfare; F 41; H 63 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11294-013-9399-y

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