GOVERNMENT DEBT AND DEFICITS IN CANADA: A Macro Simulation Analysis
This 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.
|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|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansson, Ingemar & Stuart, Charles, 1985. "Tax revenue and the marginal cost of public funds in Sweden," Journal of Public Economics, Elsevier, vol. 27(3), pages 331-353, August.
- P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
- Barro, R.J. & Martin, X.S., 1990.
"World Real Interest Rates,"
RCER Working Papers
227, University of Rochester - Center for Economic Research (RCER).
- Alesina, Alberto F & Prati, Alessandro & Tabellini, Guido, 1989.
"Public Confidence and Debt Management: A Model and a Case Study of Italy,"
CEPR Discussion Papers
351, C.E.P.R. Discussion Papers.
- Alberto Alesina & Alessandro Prati & Guido Tabellini, 1989. "Public Confidence and Debt Management: A Model and A Case Study of Italy," NBER Working Papers 3135, National Bureau of Economic Research, Inc.
- Alesina, A. & Prati, A. & Tabellini, G., 1989. "Public Confidence And Debt Management: A Model And A Case Study Of Italy," Papers 5, California Los Angeles - Applied Econometrics.
- Usher, Dan, 1986.
"Tax Evasion and the Marginal Cost of Public Funds,"
Western Economic Association International, vol. 24(4), pages 563-86, October.
- Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
- Macklem, R Tiff, 1993. "Terms-of-Trade Disturbances and Fiscal Policy in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 103(419), pages 916-36, July.
- Blanchard, Olivier J, 1985.
"Debt, Deficits, and Finite Horizons,"
Journal of Political Economy,
University of Chicago Press, vol. 93(2), pages 223-47, April.
- Jerry A. Hausman, 1983.
"Taxes and Labor Supply,"
NBER Working Papers
1102, National Bureau of Economic Research, Inc.
- Douglas Laxton & Guy Meredith & David Rose, 1994.
"Asymmetric Effects of Economic Activityon Inflation; Evidence and Policy Implications,"
IMF Working Papers
94/139, International Monetary Fund.
- Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
- Stephen Poloz & David Rose & Robert Tetlow, 1994. "The Bank of Canada's new Quarterly Projection Model (QPM): An introduction," Bank of Canada Review, Bank of Canada, vol. 1994(Autumn), pages 23-38.
- Alessandro Missale & Olivier Jean Blanchard, 1991.
"The Debt Burden and Debt Maturity,"
NBER Working Papers
3944, National Bureau of Economic Research, Inc.
- Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-98, April.
- Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
- Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
- Morris Goldstein & Geoffrey Woglom, 1991. "Market-Based Fiscal Discipline in Monetary Unions; Evidence From the U.S. Municipal Bond Market," IMF Working Papers 91/89, International Monetary Fund.
- Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9506003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.