Working Paper: CEPR ID: DP490
Authors: George S. Alogoskoufls
Abstract: This paper considers alternative modes of stabilization of world-wide and relative levels of public debt. The analysis is in terms of a model of overlapping, infinitely lived households. Three methods are compared: tax finance, public- consumption finance and monetary finance. We show that a tax-financed world-wide public-debt stabilization results in the highest reduction in consumption and the capital stock; monetary finance has no real effects in the model examined, other than on the composition of public-sector liabilities between money and bonds. A tax-financed relative public-debt stabilization by one country is shown to be associated with a greater rise in external debt and fall in relative consumption than either of the other methods. Monetary finance is again shown to have no real effects.
Keywords: open economies; public debt; capital accumulation; external debt; inflation
JEL Codes: 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax-financed rise in public debt (H69) | Higher world real interest rates (E43) |
| Tax-financed rise in public debt (H69) | Lower capital stocks (E22) |
| Lower capital stocks (E22) | Lower equilibrium real wages (J39) |
| Lower equilibrium real wages (J39) | Lower private consumption (E21) |
| Monetary finance (E59) | No real effects on consumption or capital stock (E21) |
| Monetary finance (E59) | Alters the composition of public-sector liabilities between money and bonds (H69) |
| Tax-financed relative public debt increase in one country (H69) | Greater external debt (F34) |
| Tax-financed relative public debt increase in one country (H69) | Reduction in relative consumption (D12) |
| Rise in public debt financed by government consumption (H69) | Increase in worldwide private consumption (F62) |
| Rise in public debt financed by government consumption (H69) | Decrease in output (E23) |
| Countries with high public debt ratios pegging their exchange rates to lower debt ratios (F34) | Higher external debt (F34) |
| Countries with high public debt ratios pegging their exchange rates to lower debt ratios (F34) | Reduced private consumption (E21) |