The Global Transmission of Government Debt
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.
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Volume (Year): 12 (2012)
Issue (Month): 1 (July)
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