GOVERNMENT DEBT AND DEFICITS IN CANADA: A Macro Simulation Analysis
AbstractThis 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.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 9506003.
Length: 51 pages
Date of creation: 16 Jun 1995
Date of revision:
Note: 51 printed pages, compressed PostScript file. Other recent Bank of Canada working papers are listed on the last page of this report. Bank of Canada WP95-4
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Other versions of this item:
- Tiff Macklem & David Rose & Robert Tetlow, . "GOVERNMENT DEBT AND DEFICITS IN CANADA: A Macro Simulation Analysis," Working Papers 95-4, Bank of Canada.
- E - Macroeconomics and Monetary Economics
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