Government budget deficits in an open economy
Abstract
Recent papers on the effects of government budget deficits in the context of an open economy either employ static models or exclude money and the role of production. This dissertation attempts to study the effects of budget deficits and financing methods on the world economy in an overlapping-generations model. The model is firmly grounded in intertemporal optimizing behavior of economic agents, incorporates both capital and money, and allows for alternative assumptions regarding tax policies and production technologies. It shows how one country's budget deficits affect its own as well as other countries' interest rates, inflation rates, exchange rates, balance of payments, capital accumulation and general welfare. Chapter I reviews the literature. Chapter II constructs a small-open-economy model with both lump-sum taxes and the taxes on wages and interest income to examine the optimal tax policy for financing a given budget deficit. Chapter III develops a two-country model with both money and production to study international transmission of the deficit. Chapter IV introduces heterogeneous production technologies between countries to study the effect of government debt on real exchange rates.
Degree
Ph.D.
Advisors
Lacker, Purdue University.
Subject Area
Economic theory|Finance
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