econ101fall11lecture21

econ101fall11lecture21 - Burdens of Debt Finance Debt...

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Burdens of Debt Finance Debt Finance : Government sells Bonds to (i.e., Borrows from) the Private Sector to Finance Deficits • Potential Burdens Interest on the Debt is paid by Future Generations Crowding out of Private Investment
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Debt Paid by Future Generations (i.e., Our Children) Claim : Our Children will have to sacrifice their Consumption and Standard of Living to pay the interest on the Debt • Claim hinges on whether Debt is held by US Citizens or Foreigners False if Debt is held by US Citizens True if Debt is held by Foreigners Approximately 47% of Government Debt is now held by Foreigners
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“Crowding Out” of Private Investment Claim : Debt Finance “Crowds Out” Private Investment • Leaves Future Generations with Smaller Capital Stock and thus Smaller Productive Potential • Lowers Future Standards of Living •H o w ?
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Analysis: “Crowding Out” of Private Investment • Assume: “Completely Slack” Conditions Begin with a Balanced Budget Closed Economy 0 Bud
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Model -( 1 - ) Fiscal Instruments: , , , YE ECIG CC b T Xb T R b t Y II i GG GTRTXt  
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Aggregate Planned Expenditure Effective Intercept Slope -( 1 - ) 1 - ) ECIG Cb T X b T R b t Y I i G T X b T R I i G b t Y  
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Principle: 1 st Stage 1st Stage: (1) G Bud Bud > 0 ND (2) G E Y Debt Financed Increase in Government Purchases  
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Diagram: 1 st Stage
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2 nd Stage Interest Capital Gain Return Interest Rate or Yield to Maturity on a Gov Bond 1 To sell Bonds, Gov Sets off Chain Reaction: GB MG B M GB GB GB GB GB GB GB GB i PP P InP InP i PPP P Pi ii iI  
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This note was uploaded on 01/12/2012 for the course ECON AS.180.101 taught by Professor Maccini during the Fall '08 term at Johns Hopkins.

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econ101fall11lecture21 - Burdens of Debt Finance Debt...

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