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The Global Transmission of Government Debt

Author

Listed:
  • Jung Young-Cheol

    (Thompson Rivers University)

  • Quyen Nguyen V.

    (University of Ottawa)

Abstract

The overlapping-generations model à la Diamond is extended into a world of two large open economies to investigate the global transmission effects of government debts. Initially the world economy is in a long-run equilibrium without taxes and government expenditures. The government of one country then makes a transfer to the old generation, and finances the transfer through the issuance of government debts. Thereafter, this government adopts a debt management policy to maintain the debt per young individual at a constant level. The current young generation of the country is better-off if the interest rate is slightly higher than the population growth rate, but is worse-off if the factor share of capital in national income is high. Along the equilibrium path, the welfare of a generation is lower than that of its predecessor in each country. In the long run, the welfare in both countries is lower under the new steady state.

Suggested Citation

  • Jung Young-Cheol & Quyen Nguyen V., 2012. "The Global Transmission of Government Debt," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-24, July.
    • Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:n:24
    DOI: 10.1515/1935-1690.1762
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    References listed on IDEAS

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