Advanced Search
MyIDEAS: Login

GOVERNMENT DEBT AND DEFICITS IN CANADA: A Macro Simulation Analysis

Contents:

Author Info

  • Tiff Macklem
  • David Rose
  • Robert Tetlow

Abstract

This paper examines the macroeconomic implications of rising government debt in Canada and the short-run costs and long-run benefits of stemming the rise. The discussion begins with an evaluation of the long-run consequences of increasing government indebtedness, first based on the simple arithmetic of the government's long-run budget constraint, and then based on simulations of the Bank of Canada's main model of the Canadian economy, which incorporates several channels through which government debt may affect real economic activity. The principal conclusion is that the main economic cost of higher government debt is a lower sustainable level of domestic consumption. Simulations with the full dynamic model highlight the trade-off of short-run loss for long-run gain presented by deficit reduction. There are important short-run costs of stemming a rise in debt. However, the results of this paper show that substantial net gains are obtained from doing so, since the present value of the permanent long-term gains in consumption far outweigh these short-term costs. The simulations also suggest that a fiscal contraction would require an easing of monetary conditions relative to what they would have otherwise been to maintain an inflation target. Les auteurs examinent les repercussions macroeconomiques de l'accroissement de la dette publique au Canada ainsi que les avantages et les inconvenients qui sont lies, a long et a court terme respectivement, a une deceleration de cette derniere. Les auteurs commencent par evaluer les consequences a long terme d'un accroissement de l'endettement du secteur public en s'appuyant d'abord sur un calcul simple de la contrainte budgetaire a long terme du secteur public, puis sur des simulations effectuees a l'aide du principal modele que la Banque utilise pour representer l'economie canadienne. Ce modele incorpore differents mecanismes permettant a la dette du secteur public d'influer sur l'activite economique reelle. La principale conclusion que tirent les auteurs est qu'une baisse permanente du niveau de la consommation interieure constitue le plus important cout economique que peut engendrer l'accroissement de l'endettement du secteur public. Les simulations effectuees a l'aide du modele dynamique complet font ressortir l'arbitrage qui existe entre les pertes a court terme et les gains a long terme decoulant d'une reduction du deficit et indiquent que les couts a court terme d'une deceleration de la dette sont importants. La presente etude montre toutefois qu'un tel ralentissement donne lieu a des gains nets substantiels, etant donne que la valeur actuelle de l'accroissement permanent a long terme de la consommation est de loin superieure aux couts a court terme. Les simulations laissent egalement supposer qu'un resserrement de la politique budgetaire necessiterait des conditions monetaires plus souples que ce ne serait le cas si une cible de reduction de l'inflation etait maintenue.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp95-4.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 95-4.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:bca:bocawp:95-4

Contact details of provider:
Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

Related research

Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Alesina, Alberto F & Prati, Alessandro & Tabellini, Guido, 1989. "Public Confidence and Debt Management: A Model and a Case Study of Italy," CEPR Discussion Papers 351, C.E.P.R. Discussion Papers.
  2. Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
  3. Morris Goldstein & Geoffrey Woglom, 1991. "Market-Based Fiscal Discipline in Monetary Unions: Evidence from the U.S. Municipal Bond Market," IMF Working Papers 91/89, International Monetary Fund.
  4. Jerry A. Hausman, 1983. "Taxes and Labor Supply," NBER Working Papers 1102, National Bureau of Economic Research, Inc.
  5. Macklem, R Tiff, 1993. "Terms-of-Trade Disturbances and Fiscal Policy in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 103(419), pages 916-36, July.
  6. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
  7. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  8. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-98, April.
  9. Hansson, Ingemar & Stuart, Charles, 1985. "Tax revenue and the marginal cost of public funds in Sweden," Journal of Public Economics, Elsevier, vol. 27(3), pages 331-353, August.
  10. Usher, Dan, 1986. "Tax Evasion and the Marginal Cost of Public Funds," Economic Inquiry, Western Economic Association International, vol. 24(4), pages 563-86, October.
  11. Alessandro Missale & Olivier Jean Blanchard, 1991. "The Debt Burden and Debt Maturity," NBER Working Papers 3944, National Bureau of Economic Research, Inc.
  12. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
  13. Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
  14. Stephen Poloz & David Rose & Robert Tetlow, 1994. "The Bank of Canada's new Quarterly Projection Model (QPM): An introduction," Bank of Canada Review, Bank of Canada, vol. 1994(Autumn), pages 23-38.
  15. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Denise Côté & Christopher Graham, 2004. "Convergence of Government Bond Yields in the Euro Zone: The Role of Policy Harmonization," Working Papers 04-23, Bank of Canada.
  2. William Scarth, 1999. "Alternatives for Raising Living Standards," Department of Economics Working Papers 1999-08, McMaster University.
  3. Nopphadon Buranathanung & Chaipat Poonpatpibul, 2002. "External Debt Dynamics and Current Account Sustainability," Working Papers 2002-03, Economic Research Department, Bank of Thailand.
  4. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers Department of Economics 2000/12, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  5. Fillion, J.F., 1996. "L'endettement du Canada et ses effets sur les taux d'interet reels de long term," Working Papers 96-14, Bank of Canada.
  6. Robert Lavigne, 2006. "The Institutional and Political Determinants of Fiscal Adjustment," Working Papers 06-1, Bank of Canada.
  7. William Scarth, 1999. "Alternatives for Raising Living Standards," Social and Economic Dimensions of an Aging Population Research Papers 5, McMaster University.
  8. Butler, L, 1996. "The Bank of Canada's New Quarterly Porjection Model Part 4 : A Semi- Structural Method to Estimate Potential Output : Combining Economic Theory with a Time-Series Filter," Technical Reports 77, Bank of Canada.
  9. Lavigne, Robert, 2011. "The political and institutional determinants of fiscal adjustment: Entering and exiting fiscal distress," European Journal of Political Economy, Elsevier, vol. 27(1), pages 17-35, March.
  10. William Scarth, 1999. "Alternatives for Raising Living Standards," Quantitative Studies in Economics and Population Research Reports 344, McMaster University.
  11. Noppadol Buranathanung & Chaipat Poonpatpibul, 2003. "External Debt Dynamics and Current Account Sustainability," Working Papers 2003-10, Economic Research Department, Bank of Thailand.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:95-4. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.