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Can higher debt lead to higher welfare? A theoretical and numerical analysis

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  • Sugata Ghosh

Abstract

This paper demonstrates, for a two-good, two-country model with finitely-lived agents, the possibility of using national debt as a policy instrument to improve welfare via an improvement in the terms of trade. The latter is large enough to outweigh the negative effect of crowding out of capital that results from higher debt. It is shown that without retaliatory behaviour, a welfare-maximizing level of debt is theoretically obtainable for values less than half the elasticity of substitution in consumption. For a substitution elasticity equal to half zero debt is the optimum.

Suggested Citation

  • Sugata Ghosh, 1998. "Can higher debt lead to higher welfare? A theoretical and numerical analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 5(2), pages 111-116.
    • Handle: RePEc:taf:apeclt:v:5:y:1998:i:2:p:111-116
    DOI: 10.1080/758523515
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    Cited by:

    1. Dirk Willenbockel, 2005. "Public debt, the terms of trade and welfare in an overlapping generations model with lifetime uncertainty," Economics Bulletin, AccessEcon, vol. 5(10), pages 1-8.
    2. K. R. Shanmugam & K. Shanmugam, 2022. "Sustainability and Threshold Value of Public Debt in Tamil Nadu," Working Papers 2022-226, Madras School of Economics,Chennai,India.
    3. Makun, Keshmeer, 2021. "External debt and economic growth in Pacific Island countries: A linear and nonlinear analysis of Fiji Islands," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    4. K. R. Shanmugam & P.S. Renjith, 2023. "Sustainability and Threshold Value of Public Debt of Centre and All State Governments in India," Working Papers 2023-240, Madras School of Economics,Chennai,India.
    5. K. R. Shanmugam & P.S. Renjith, 2022. "Empirical Analysis on Sustainability of Public Debt in Indian States," Working Papers 2022-235, Madras School of Economics,Chennai,India.
    6. P.S. Renjith & K.R. Shanmugam, 2018. "Sustainable Debt Policies of Indian State Governments," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 12(2), pages 224-243, May.

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