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Public debt sustainability in a globally integrated market

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  • Mark Roberts

Abstract

Public debt is considered in a multi-country Diamond model, initially, where the deficit is exogenous, giving bifurcation maxima, and, subsequently, where it is determined by a policy trade-off between its deficit financing benefit and its crowding-out cost. In the latter case, two effects arise: first, the Chang (1990) financing externality; and second, negative feedback from the debt to the deficit, initially discovered in the data by Bohn (1998), occurs as an endogenous outcome – and one which is strengthened by the degree of international financial integration. The Chang effect implies countries will over-issue public debt under financial globalization, which will also threaten the sustainability of equilibrium in a nonlinear model. The endogenous Bohn feedback effect, although inherently stabilizing, is not decisively so, causing bifurcations to remain, if policy-makers regard deficits and capital as imperfect substitutes. However, for the perfect substitutes case, it works very powerfully even to eradicate the adjustment dynamics and to deliver higher-valued, corner-point maxima.

Suggested Citation

  • Mark Roberts, 2016. "Public debt sustainability in a globally integrated market," Discussion Papers 2016/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  • Handle: RePEc:not:notcfc:16/03
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    File URL: http://www.nottingham.ac.uk/cfcm/documents/papers/cfcm-2016-03.pdf
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    References listed on IDEAS

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    1. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1243-1259.
    2. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
    3. Chalk, Nigel A., 2000. "The sustainability of bond-financed deficits: An overlapping generations approach," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 293-328, April.
    4. Karl Farmer & Jacopo Zotti, 2010. "Sustainable government debt in a two-good, two-country overlapping generations model," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 57(3), pages 289-316, September.
    5. Chang, Roberto, 1990. "International coordination of fiscal deficits," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 347-366, June.
    6. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
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    Keywords

    Public debt; portfolio; bifurcation; global integration; policy; economic growth;

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