Sustainable government debt in a two-good,two-country overlapping generations model |
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Authors: | Karl Farmer Jacopo Zotti |
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Institution: | (1) Department of Economics, University of Graz, Universitaetsstr. 15, 8010 Graz, Austria;(2) Department of Economics, University of Hamburg, Von-Melle-Park 5, 20146 Hamburg, Germany |
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Abstract: | The recent dramatic rise of government deficits in most advanced countries to counter the effects of the global financial
crisis arouses renewed interest for one of the perennial topics of fiscal policy: the sustainability of government debt. This
paper explores maximum sustainabile debt in a two-good, two-country overlapping generations (OLG) model and analyzes existence
and dynamic stability of steady states as well as the transitional dynamics of private capital when government debt remains
below the maximum sustainable level. We find that maximum government debt levels for both countries exist and are negatively
related. Moreover, if sustainable government debt is unilaterally expanded, private capital is crowded out in both countries
while the terms of trade of the debt-expanding country are unaffected if capital income shares are internationally equal. |
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