High debt Flashcards
Why is looking at high debt important ??
-As gov debt slows capital accumulation and puts at risk the stability of the economic system, making it extremely difficult to conduct monetary policy
-High debt countries face more macroeconomic problems
What is the budget constraint of the government ??
Debt, deficit, government spending and taxes and the debt to GDP ratio
How do you analyse the debt to gdp ratio
By looking at what factors affect the evolution of debt to gdp and debt accumulation
Budget deficits for the US
Primary deficit - gov spending (G) - taxes (T)
Cyclically adjusted deficit - measures what the deficit would be if output were at its natural level, adjusts deficit for the current point of the economy on the business cycle
Inflation adjusted deficit - The deficit measured in real terms
What is an assumption made when looking at the governments budget constraint ??
That the only means of deficit financing is selling securities to private investors
The governments budget constraint
B = bonds and bills issued
r = the real interest rate
rB t-1 = real interest rate paid on gov bonds in circulation
G = gov spending
T = taxes
What happens to gov debt is gov runs in a deficit
Debt increases
What happens to gov debt is gov runs in a Surplus ?
Debt decreases
What is the equation to find the current years debt
What happens to the budget constraint if u repay after 1 year ?
What happens to the budget constraint if u repay after t years ?
Whats the first conclusion you can make about taxes in gov budget constraint
-If G is unchanged, reduction of taxes today must be offset by an increase in future taxes
-Delaying the tax increase, or a higher interest rate means that the increase in taxes must be larger
If the government wants to stabilise at a higher level (B1 = B0 = 1)
-To stabilise debt, government must achieve a primary surplus equivalent to the real interest on existing debt, r, and must do this in every subsequent year
What is the government budget constraint in terms of gdp ?
What 2 sums tell us the change in the debt ratio ?
-This tells us that the difference between real interest rate and the rate of growth of GDP, multiplied by the debt ratio at the end of the previous period
-The ratio of the primary deficit to GDP
What does this equation show us ?
That debt level evolved with real interest rate, r
What does this equation show ??
Debt to GDP ratio evolves not only with r but also with g
Debt/GDP will evolve at (r-g)
