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Public-Debt Sustainability, Real Exchange Rate, and Country-Specific Saving Rates

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  • Karl Farmer

Abstract

The recent euro crisis has caused concerns both with respect to public-debt sustainability and the stability of exchange rates of highly indebted countries. This paper investigates these concerns in a two-country OLG model of the world economy with country-specific saving rates to mimic Asian economies. It is found that the concerns with respect to debt-sustainability are warranted since limits for public debt levels do exist. The concerns regarding exchange-rate stability are not warranted since unilateral debt expansion does not impact the real exchange at all, or the impacts are independent of the external balance of the debt-expanding country. Copyright International Atlantic Economic Society 2011

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  • Karl Farmer, 2011. "Public-Debt Sustainability, Real Exchange Rate, and Country-Specific Saving Rates," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(1), pages 45-65, February.
    • Handle: RePEc:kap:iaecre:v:17:y:2011:i:1:p:45-65:10.1007/s11294-010-9284-x
    DOI: 10.1007/s11294-010-9284-x
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    References listed on IDEAS

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    More about this item

    Keywords

    Sustainability; Public debt; Real exchange rate; Two-country OLG model; H63; F41;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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