Economics of U.S. Government Debt Accumulation

The United States of America is an indebted nation in the early years of the new millennium, changing from $469 billion in 1973 to $14 trillion in 2010, as spending is justified on the basis that it promotes GDP growth which in turn increases societal benefits. Despite the benefits of debt, its effectiveness and the transmission mechanisms of fiscal policy are still on debate. Consequently, the economic effects of U.S. government debt accumulation are studied in three empirical research articles. The dissertation is composed of five chapters. The first chapter is an introduction wherein the problem statement, the purpose, objectives and justifications are discussed. Then, the three articles are presented. The analyses used dynamic econometric models and data in the post Bretton Woods system of monetary management. Finally, the results are summarized in the fifth chapter. The first article studied the effects of government debt on employment and the unemployment rate. The results indicate that debt has positive effects on employed labor in the economy in the long run, and it was found effective at retaining and decreasing the unemployment rate. Moreover, an unemployment rate shock produced a hump-shaped response of government debt. The second article studied the effects of government debt on exports. The causality tests did not provide evidence to support a relationship among those variables; however, the response of exports to a debt shock was positive and hump-shaped. Finally, the third article studied the transmission of U.S. government debt shocks into the Mexican economy; the results indicate that debt produces positive externalities as its GDP grows. Moreover, Mexican GDP is favored by increasing U.S. GDP; furthermore, a positive U.S. employment shock produced a hump-shaped response of Mexican GDP. In conclusion, U.S. government debt depreciates the currency which leads to price fluctuations of output and the inputs of production; in turn, the economy is likely to experience growth in exports, GDP, and employment that favors the economic growth of Mexico through trade. Finally, future research endeavors in the economics of government debt accumulation may contemplate to study the cooperative interdependence among political institutions involved in fiscal and economic policies.