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

Farmer, Karl; Schelnast, Matthias
May 2013
International Advances in Economic Research;May2013, Vol. 19 Issue 2, p167
Academic Journal
Financial crises accompanied by banking crises often entail heavy fiscal legacies. For the U.S., for example, the gross government debt to GDP ratio exceeded 100 % in 2012. Due to the unsustainability of public debt, both in the U.S. and in other advanced countries, moves towards a substantial reduction in debt levels would appear to be unavoidable. However, as shown in this paper, the long-run welfare impact of debt reduction in advanced countries, both at home and abroad, may prove to be somewhat of a disincentive for policy makers. In particular, we find that under conditions of dynamic inefficiency, and when Home (U.S.) has a negative external balance and a lower capital production share than Foreign (China), both domestic and foreign welfare decrease if Home reduces public debt.


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