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Public Debt Reduction in Advanced Countries and Its Impact on Emerging Countries

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  • Karl Farmer
  • Matthias Schelnast

Abstract

Financial crises accompanied by banking crises often entail heavy fiscal legacies. For the U.S., for example, the gross government debt to GDP ratio exceeded 100 % in 2012. Due to the unsustainability of public debt, both in the U.S. and in other advanced countries, moves towards a substantial reduction in debt levels would appear to be unavoidable. However, as shown in this paper, the long-run welfare impact of debt reduction in advanced countries, both at home and abroad, may prove to be somewhat of a disincentive for policy makers. In particular, we find that under conditions of dynamic inefficiency, and when Home (U.S.) has a negative external balance and a lower capital production share than Foreign (China), both domestic and foreign welfare decrease if Home reduces public debt. Copyright International Atlantic Economic Society 2013

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2013. "Public Debt Reduction in Advanced Countries and Its Impact on Emerging Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(2), pages 167-188, May.
    • Handle: RePEc:kap:iaecre:v:19:y:2013:i:2:p:167-188:10.1007/s11294-013-9399-y
    DOI: 10.1007/s11294-013-9399-y
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