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Government Debt: Should we be unduly alarmed - Essay Example

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Government debt: Should we be “unduly” alarmed? Is the statement “one should not be unduly alarmed by the size of government debt as it does not need to be repaid because it is only a debt that we owe to ourselves” valid? Recently, in the Caucasus Research Resource Centre program funded by the Carnegie Foundation of New York, Kyurumyan (2009) took the position that we should not be alarmed on the size of government debts and asserted that incurring domestic debts continue to be a sustainable means for addressing public deficits in the medium to the long runs, at least for South Caucasus…
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Government Debt: Should we be unduly alarmed

Download file to see previous pages... 413, 487). The theory of Ricardian equivalence predicts that “fiscal deficits or surpluses do not influence the GDP” or the gross domestic product (Miles and Scott 2005, p. 593). Government debts result from government’s fiscal policy when fiscal policy is oriented towards providing fiscal stimulus and, consequently, a regime of s liberal spending policy is installed (Baumol and Blinder 2009, p. 226). Although “an increase in government purchases stimulates the aggregate demand for goods and services, it also causes the interest rates to rise, which reduces investment spending and puts downward pressure on aggregate demand” (Mankiw 2009, p. 375). The increase in interest rates decreases the demand for goods and services (Mankiw 2009, p. 376). The ultimate falling out in aggregate demand resulting from fiscal expansion when the fiscal policy inflates the interest rates is known as crowding out (Mankiw 2009, p. 375). ...
267). Dornbusch et al. (2011, p. 267) articulated that the combination of fiscal and monetary expansion has been known as “monetizing the budget deficit.” In situations in which the budget deficit is monetized, the monetary authority prints the money “to buy the bonds” that government will use to finance its deficits (Dornbusch et al. 2011, p. 267). However, monetizing deficits is inflationary and citizens acquire the budget deficit with a higher inflation rate. The effect of and expansionary fiscal policy will also depend on whether the fiscal deficit is bond-financed or financed through the creation of money. If the expansionary fiscal policy is financed through government sales of bonds, then government will have debts which citizens will have to repay through higher taxes in the future. If the expansionary fiscal policy is financed through the creation of money then citizens will have to pay for the fiscal expansionary policy through higher inflation. Because citizens ultimately pay for the expansionary fiscal policy, governments may adopt a policy of fiscal consolidation. In the fiscal consolidation, governments attempts to reduce both government deficits and accumulated debts (OECD 2001). The framework for fiscal consolidation can take the form of stabilizing the debt-to-income ratio to equal income growth. Following this principle serves as a form of debt ceiling. The policy can be supplemented by Tobin taxes intended to keep exchange and interest rates volatilities low so the macroeconomic effects of public debts on the economy are kept controlled or moderated. Tobin taxes has been proposed in G-20 meetings but elicited a lukewarm response from the International Monetary Fund (Stuckler et al. ...Download file to see next pagesRead More
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