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Public Debt Reduction in Advanced Countries and Its Impacts on Emerging Countries

In: Growth and International Trade

Author

Listed:
  • Karl Farmer

    (University of Graz)

  • Matthias Schelnast

    (University of Graz)

Abstract

Financial crises associated with banking crises leave heavy fiscal legacies. For the USA e.g. an increase in the gross government debt to GDP ratio towards more than 100 % is predicted by 2012. Due to its unsustainability a significant reduction of public debt in the USA and in other advanced countries seems to be indispensable. However, as shown in this paper, the long run welfare effects of debt reduction in advanced countries at home as well as on emerging countries are not in accordance with debt reduction necessities. In particular, we show that domestic and foreign welfare decrease when the domestic country (USA) reduces public debt, given that this country has a negative external balance and a lower capital production share than the other country (China) and that dynamic inefficiency holds.

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2013. "Public Debt Reduction in Advanced Countries and Its Impacts on Emerging Countries," Springer Texts in Business and Economics, in: Growth and International Trade, edition 127, chapter 15, pages 333-360, Springer.
    • Handle: RePEc:spr:sptchp:978-3-642-33669-0_15
    DOI: 10.1007/978-3-642-33669-0_15
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