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Government Debt, Capital Accumulation, and the Terms of Trade in a Model of Interdependent Economies

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  • Zee, Howell H

Abstract

This paper extends P. Diamond's overlapping generations model into a two-good, two-country setting to analyze the impact of an increase in domestic government debt on the terms of trade, the current account, and capital accumulation at home and abroad. It is found that while the direction of change in the terms o f trade is indeterminate in the short run, for stability it must agr ee with that in the steady state, which in turn is dependent on the i nitial debt status in trade of the home country. However, the higher level of government debt leads unambigously to lower levels of capita l stocks. Copyright 1987 by Oxford University Press.

Suggested Citation

  • Zee, Howell H, 1987. "Government Debt, Capital Accumulation, and the Terms of Trade in a Model of Interdependent Economies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 599-618, October.
    • Handle: RePEc:oup:ecinqu:v:25:y:1987:i:4:p:599-618
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    Cited by:

    1. Bednar-Friedl, Birgit & Farmer, Karl, 2010. "External balance, dynamic efficiency, and the welfare effects of unilateral and multilateral permit policies in interdependent economies," Economic Modelling, Elsevier, vol. 27(5), pages 980-990, September.
    2. Karl FARMER, 2010. "Public Debt Sustainability, Exchange Rates and Country-Specific Saving Rates," EcoMod2010 259600054, EcoMod.
    3. 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.
    4. Birgit Bednar-Friedl & Karl Farmer & Andreas Rainer, 2010. "Effects of Unilateral Climate Policy on Terms of Trade, Capital Accumulation, and Welfare in a World Economy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(4), pages 495-520, December.
    5. Karl FARMER & Jacopo ZOTTI, 2009. "Sustainable Government Debt in a Two-Country, Two-Good Overlapping Generations Model," EcoMod2009 21500030, EcoMod.
    6. repec:kap:iaecre:v:17:y:2011:i:1:p:45-65 is not listed on IDEAS
    7. repec:grz:wpaper:2016-05 is not listed on IDEAS
    8. Karl Farmer, 2011. "Public-Debt Sustainability, Real Exchange Rate, and Country-Specific Saving Rates," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(1), pages 45-65, February.
    9. Karl Farmer, 2016. "The Intertemporal Equilibrium Modeling of Intra-EMU and Global Trade Imbalances," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(4), pages 377-395, November.
    10. Karl Farmer & Matthias Schelnast, 2013. "Public Debt Reduction in Advanced Countries and Its Impact on Emerging Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(2), pages 167-188, May.
    11. Condea Bogdan Virgil & Harangus Daniela, 2014. "Impact Of The Global Financial Crisis On Sovereign Debt In The European Union," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 719-727, July.

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