Fiscal Policy and Government Debt: Theory and Empirical Evidence

This dissertation studies the effects of fiscal policy and the challenges due to government debt. The first part of the work consists of an analysis of fiscal policy and government debt in theoretical models. We show in Chapter 2, how the public debt structure, split into internal and external debt, influences the outcome in means of the steady state of an economy within a three overlapping generations model. In Chapter 3, the effect of a national debt shock within the European Monetary Union is analyzed, taking a modified Galí/Monacelli New-Keynesian model for the EMU as a basis. In the second part, the manner and effectiveness of German fiscal policy in 1991-2009 are examined. Chapter 4 characterizes fiscal policy in Germany by using a production function based approach. Finally, we show in Chapter 5, how fiscal shocks would have affected the main German economic variables in 1991-2009; the analysis is carried out in a structural vector autoregression model framework. In this context, special attention is paid to international trade variables since Germany is characterized by its export-orientation and the need for imported goods. In times of the lasting financial and economic crisis in the European Monetary Union, the examined topics are more existent than ever.