The Study Of Government Debt In Advanced Economies

The severe financial crisis that hit the world economy in2008not only caused alarge decline in output and brought about an uncertain economic outlook, it also harmedmany countries’ public finances. After the financial crisis, Developed economies arebogged down in the mire of debt, the US faced an unsustainable debt burden alongsidesustained political paralysis, and the European Union have been buckling under theweight of sovereign debt and political discord. The failure of fiscal adjustment in theadvanced economies has damaged long-term growth prospects of the world. Thisproblem has become unbearable for the world economy. Now debt reduction has becomeone of the main policy issues in most of the advanced economies. Advanced economiesare struggling for the antidotes in the sovereign debt storm. They still do not find the wayto achieve a balanced budget and reduce government debt. Against this background，thepaper will research on these important issues: How has government debt evolved? Whatthe impact of government debt on the economy? What factors help to reduce governmentdebt? Can "financial repression" policy successfully resolve the debt impasse? How tosuppress the tendency of government debt in the long run?Firstly, the paper reviewed the evolution government debt, compared the differenceof government debt in different periods, and found that since the1970s government debtbecomed endogenous in advanced countries. Then the paper explored the nonlinearrelationship between government debt and economic growth. The analysis based on apanel of61advanced and emerging market economies. The system GMM method wasused in the study to deal with the reverse causality and endogeneity. The empirical resultssuggest the relationship between government debt and economic growth can be describedby an inverted U-shaped pattern, and threshold effects exist both in advanced andemerging market economies. But the turning point between public debt and GDP growthvaries significantly by country and macroeconomic variable(such as interest rates、inflation、current account and financial development).Against this background this paper analyzed past episodes of reductions in thehistory to provide insights on policy options for successful debt reductions in the future.The first step is defining a successful debt reduction period, using data for the period 1985-2009this paper found195successful public debt reduction periods. Then I estimatewhich factors determine the probability of a successful debt reduction. The findingssuggest that: major debt reductions are mainly driven by decisive and lasting fiscalconsolidation efforts focused on reducing government expenditure, while tax increasesare less likely to contribute to a large and persistent debt reduction. Robust real GDPgrowth increases the likelihood of a major debt reduction because it helps countries togrow their way out of indebtedness. The effect of inflation is relatively small；Thesuccess of government debt reduction also extremely sensitive to the change of nominalinterest rates; Finally It is also worth noting that major debt reductions mainly occurredin times of higher interest burden or debt servicing cost. But there is a huge differencebetween various periods for the conclusion.In recent years, along with large increases in government debt in advancedeconomies, financial repression has reemerged because of its unique advantage inresolving the debt problem. After World War II, the scale of government debt reached arecord vertex. To solving the problem, financial repression played an important role.However, because of the different external conditions, the effect of financial repressionhas been greatly reduced. At the same time it will brought new challenges to the globaleconomy.The starting point of the current government debt cycle can be traced back to the1970s. Earlier accumulation of government debt in developed countries is often linkedwith the war. Since the1970s, however, debt levels continued to grow without war andconflict has become a unique phenomenon. In new political economics research field,“incomplete knowledge” of the voter and “strategic interaction” in the political processmade a strong explanation, so that government debt becomes endogenous. Developedcountries are trying to use the fiscal rules inhibit the expansion of government debt for along time, But our empirical testing found that the rules are not successful; it can noteliminate the problem the endogeneity of debt. The success of independent central bankinspired the institutional arrangement of the independent Fiscal councils in the aftermathof the crisis, and it is beginning to receive the attention of more people. Our analysisshows that the institutional arrangements could be the solution of the endogenousgovernment debt theoretically. Historical experience suggests there are some principles for the Independent Fiscal councils to dealing with high debt burdens, and offers bothinstructive lessons and cautionary tales for the policy makers in the cloud of governmentdebt. In Chapter7, the final conclusions are summarized after the whole study and somecomments are made on the government debt problems. Finally, on the basis of theseresearch conclusions, the issues need to be further studied are also discussed.