DP490 On Public Debt Stabilizations in an Interdependent World

Author(s): George Alogoskoufis
Publication Date: January 1991
Keyword(s): Capital Accumulation, External Debt, Inflation, Open Economies, Public Debt
JEL(s): 430
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=490

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.