China's Growing Government Debt in a Computable Overlapping Generations Model |
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| Authors: | Shiyu Li Shuanglin Lin Yan Wang Fan Zhai |
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| Affiliation: | 1. China Financial Policy Research Center, Renmin University of China;2. Peking University, and University of Nebraska Omaha;3. George Washington University, and The World Bank;4. China Investment Corporation, and The Asian Development Bank |
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| Abstract: | This paper simulates the effects of China's growing government debt in a computable equilibrium model of overlapping generations. Our model assumes that the government increases debt to finance its spending in the short run, and then increases taxes or cuts spending to keep the debt–GDP ratio constant. The spending‐driven government debt increases public capital and output in the short run, but decreases private investment, total capital stock, output, and net exports in the long run, and makes the future generations worse off. Among various means of debt control, a decrease in government spending seems to be the least harmful to private investment, capital stock, and output while an increase in capital taxation is most detrimental. |
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