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Real Exchange Rate and Public Debt in a Two-Advanced-Country OLG Model

In: Growth and International Trade

Author

Listed:
  • Karl Farmer

    (University of Graz)

  • Matthias Schelnast

    (University of Graz)

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 chapter investigates these concerns in a two-good, two-country OLG model of the world economy with country-specific saving rates to mimic also Asian economies. We find that the concerns with respect to debt-sustainability are warranted since limits for national debt levels do exist. The concerns regarding exchange-rate stability are not warranted since unilateral debt expansion does not impact the real exchange rate at all or the impacts are independent of the external balance of the debt-expanding country.

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2013. "Real Exchange Rate and Public Debt in a Two-Advanced-Country OLG Model," Springer Texts in Business and Economics, in: Growth and International Trade, edition 127, chapter 14, pages 301-331, Springer.
    • Handle: RePEc:spr:sptchp:978-3-642-33669-0_14
    DOI: 10.1007/978-3-642-33669-0_14
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