On Public Debt Stabilizations in an Interdependent World

This paper considers alternative modes of stabilization of world-wide and relative levels of public debt. The analysis is in terms of a model of overlapping, infinitely lived households. Three methods are compared: tax finance, public- consumption finance and monetary finance. We show that a tax-financed world-wide public-debt stabilization results in the highest reduction in consumption and the capital stock; monetary finance has no real effects in the model examined, other than on the composition of public-sector liabilities between money and bonds. A tax-financed relative public-debt stabilization by one country is shown to be associated with a greater rise in external debt and fall in relative consumption than either of the other methods. Monetary finance is again shown to have no real effects.