Topic_4_-_Government_Debt

# Topic_4_-_Government_Debt - m a c r o Government Debt Topic...

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Unformatted text preview: m a c r o Government Debt Topic 4 Topic 4 – Government Debt Government Debt slide 1 In this chapter you will learn about In this chapter you will learn about ¡ problems measuring the budget deficit ¡ the traditional and Ricardian views of the government debt ¡ other perspectives on the debt Topic 4 Topic 4 – Government Debt Government Debt slide 2 Indebtedness of the CARICOM Countries Indebtedness of the CARICOM Countries 46.6 46.6 St. Vincent &amp; the Grenadines St. Vincent &amp; the Grenadines Source: www.caricom.org Source: www.caricom.org 26.7 26.7 St. Lucia St. Lucia 49.3 49.3 St. Kitts &amp; Nevis St. Kitts &amp; Nevis 31.5 31.5 Grenada Grenada 37 37 Dominica Dominica 64.6 64.6 Antigua &amp; Barbuda Antigua &amp; Barbuda 20.7 20.7 T&amp;T T&amp;T 48.7 48.7 Jamaica Jamaica 166.2 166.2 Guyana Guyana Govt Govt Disbursed Debt Disbursed Debt (% of GDP) (% of GDP) Country Country Topic 4 Topic 4 – Government Debt Government Debt slide 3 Problems Measuring the Deficit Problems Measuring the Deficit 1. Inflation 2. Capital assets 3. Uncounted liabilities 4. The business cycle Topic 4 Topic 4 – Government Debt Government Debt slide 4 Measurement problem 1: Measurement problem 1: Inflation Inflation ¡ To see why inflation is a problem, suppose the real debt is constant, which implies a zero real deficit. ¡ In this case, the nominal debt D grows at the rate of inflation: ∆ D/D = π or ∆ D = π D ¡ The reported deficit (nominal) is π D even though the real deficit is zero. ¡ Hence, should subtract π D from the reported deficit to correct for inflation. Topic 4 Topic 4 – Government Debt Government Debt slide 5 Measurement problem 1: Measurement problem 1: Inflation Inflation ¡ Correcting the deficit for inflation can make a huge difference, especially when inflation is high. ¡ Example: nominal deficit = \$28 billion inflation = 8.6% debt = \$495 billion π D = 0.086 × \$495b = \$43b real deficit = \$28b − \$43b = \$15b surplus Topic 4 Topic 4 – Government Debt Government Debt slide 6 Measurement problem 2: Measurement problem 2: Capital Assets Capital Assets ¡ Currently: deficit = change in debt ¡ Better: Capital budgeting deficit = (change in debt) − (change in assets) ¡ EX: Suppose govt sells an office building and uses the proceeds to pay down the debt. – Under current system, deficit would fall – Under capital budgeting, deficit unchanged, because fall in debt is offset by a fall in assets ¡ Problem w/ cap budgeting: determining which govt expenditures count as capital expenditures....
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## Topic_4_-_Government_Debt - m a c r o Government Debt Topic...

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