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Financial and Fiscal PoliciesCrises and New Realities$
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Y. V. Reddy, Narayan Valluri, and Partha Ray

Print publication date: 2014

Print ISBN-13: 9780199452651

Published to Oxford Scholarship Online: November 2014

DOI: 10.1093/acprof:oso/9780199452651.001.0001

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Public Debt, National Income, and Growth

Public Debt, National Income, and Growth

A Selective Review

Chapter:
(p.227) Chapter 9 Public Debt, National Income, and Growth
Source:
Financial and Fiscal Policies
Author(s):

Y.V. Reddy

Narayan Valluri

Partha Ray

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199452651.003.0009

This chapter presents a literature survey of the economic theories underlying fiscal policy and public debt and its impact on national income and growth. The coverage is particularly focused on the standard theories of the mainstream literature that considers short-run and long-run impact of government deficit and debt. While in the short run increased government expenditure or tax cut would lead to increase in aggregate demand that would raise national income, long-term impact of public debt could entirely be different. The equivalence of debt-financed and tax-financed public expenditure (Barro-Ricardo propositions) is also looked into and the chapter notes its limited relevance in view of its restrictive assumptions. Some insights from the non-mainstream literature, which in general, are more favourably disposed towards fiscal activism, are also covered. Finally, the chapter takes up the recent empirical literature and related controversies following Reinhart and Rogoff’s finding of 90 per cent threshold debt-GDP ratio.

Keywords:   Ricardian equivalence, public debt—long-term impact, public debt—short-term impact, seigniorage, original sin, Reinhart and Rogoff, public debt, government deficit, debt sustainability

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