China's Growing Government Debt in a Computable Overlapping Generations Model. (10th August 2016)

• Record Type: Journal Article
• Authors: Li, Shiyu; Lin, Shuanglin; Wang, Yan; Zhai, Fan
• Is Part Of: Pacific economic review. Volume 23:Number 3(2018)
• Page Start: 359
• Page End: 384
• Publication Date: 2016-08-10
• Subjects: Pacific Area -- Economic conditions -- Periodicals; 330
• DOI: 10.1111/1468-0106.12172
• Languages: English
• ISSNs: 1361-374X

Abstract

Abstract: 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.