13
The Government’s Budget Constraint
14
The Government’s Budget Constraint
15
The Budget Deficit
16
The Budget Deficit
If the government owned capital, its net real assets would include this capital.
In particular, we continue to simplify by assuming that all bonds have very short maturity.
7
Characteristics of Government Bonds
We also assume that, like private bonds, government bonds specify nominal amounts of principal and interest.
17
The Budget Deficit
18
The Budget Deficit
19
The Budget Deficit
If the right-hand side of equation (14.4) is greater than zero, the government’s revenue exceeds its expenditure. Economists describe this situation as a budget surplus.
4
The History of the Public Debt in the United States and the United Kingdom
5
The History of the Public Debt in the United States and the United Kingdom
A budget deficit means that the quantity of public debt increases over time.
3
The History of the Public Debt in the United States and the United Kingdom
Chapter 14 The Public Debt
1
The Public Debt
In recent years, one of the most controversial economic issues has been the government’s budget deficit.
At least from reading the newspapers, we would think that the economy suffers greatly when the government runs a deficit.
6
Characteristics of Government Bonds
In the model, the government can now borrow funds from households by issuing interest-bearing bonds.
We assume that these government bonds pay interest and principal in the same way as the private bonds in the model.
As we shall see, our conclusions depart dramatically from those expressed in the newspapers.
2பைடு நூலகம்
The Public Debt
Budget deficits arise when the government finances part of its expenditures by issuing interest-bearing government bonds—public debt—rather than levying taxes.
9
Characteristics of Government Bonds
10
Characteristics of Government Bonds
11
Budget Constraints and Budget Deficits
12
The Government’s Budget Constraint
That is, we do not consider indexed bonds, which we discussed in chapter 11.
8
Characteristics of Government Bonds
We assume that bondholders (households in our model) regard government bonds as equivalent to private bonds.
In that case, an increase in government owned capital stock—called net public investment—would mean that the government had more net real assets.
Thus, an increase in net public investment means that the government is saving more or dissaving less in real terms.
Specifically, we do not allow for the possibility that private bonds are riskier than government bonds in terms of the probability of default.
In this case, households would hold the two kinds of bonds only if they paid the same nominal interest rate, i.