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China's Growing Government Debt in a Computable Overlapping Generations Model
Author(s) -
Li Shiyu,
Lin Shuanglin,
Wang Yan,
Zhai Fan
Publication year - 2018
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12172
Subject(s) - economics , government debt , monetary economics , internal debt , computable general equilibrium , debt , debt to gdp ratio , overlapping generations model , government spending , public finance , stock (firearms) , external debt , debt levels and flows , investment (military) , macroeconomics , capital accumulation , capital (architecture) , market economy , welfare , human capital , mechanical engineering , engineering , history , archaeology , political science , law , politics
This paper simulates the effects of China's growing government debt in a computable equilibrium model of overlapping generations. Our model assumes that the government increases debt to finance its spending in the short run, and then increases taxes or cuts spending to keep the debt–GDP ratio constant. The spending‐driven government debt increases public capital and output in the short run, but decreases private investment, total capital stock, output, and net exports in the long run, and makes the future generations worse off. Among various means of debt control, a decrease in government spending seems to be the least harmful to private investment, capital stock, and output while an increase in capital taxation is most detrimental.