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 17 in Growth and International Trade, 2021, pp 397-424 from Springer

Abstract: Abstract Financial crises associated with banking crises or the recent Pandemic-related lockdowns leave heavy fiscal legacies. For the USA, e.g., an increase in the gross government debt-to-GDP ratio toward nearly 150% is predicted by 2021. 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 chapter, 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: 2021
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Chapter: Public Debt Reduction in Advanced Countries and Its Impacts on Emerging Countries (2013)
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DOI: 10.1007/978-3-662-62943-7_17

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