Answer to Question 3: Crocodile Mouth Theory versus Blanchard Claim

Yoshikiyo Sakai ()
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Yoshikiyo Sakai: Kanagawa University

Chapter Chapter 6 in Deflation and Fiscal Deficits, 2024, pp 51-70 from Springer

Abstract: Abstract We theoretically analyze how public debt affects the economy. There are two opposing ideas: the heavy public debt leads to fiscal collapse, or it contributes to economic efficiency. First, we derive the condition under which the current public debt can be redeemed by refinancing government bonds. This means that there is the limit to government bonds issued, and if they exceed the maximum, it will not be possible for the government to repay the current public debt. Therefore, the assertion that “accumulated public debt must be reduced as soon as possible” is applicable. On the other hand, in the same model, we show that if the current public debt can be repaid, namely refinancing succeeds, the economy with the larger public debt is more efficient according to Pareto criterion. This corresponds to Blanchard’s assertion that public debt contributes to economic welfare, not costs. Thus, these two conflicting claims can be explained coherently by clarifying whether the current public debt satisfies the redeemable condition.

Date: 2024
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DOI: 10.1007/978-981-97-0415-6_6

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