INTERNATIONAL ECONOMIC ASSOCIATION General Editors: Sir Austin Robinson (1950-80), Sir Douglas Hague (1980-6), Michael Kaser (1986- ) Kenneth J. Arrow and Michael J. Boskin (editors) THE ECONOMICS OF PUBLIC DEBT Bela Balassa and Herbert Giersch (editors) ECONOMIC INCENTIVES William J. Baumol (editor) PUBLIC AND PRIVATE ENTERPRISE IN A MIXED ECONOMY Ansley J. Coale (editor) ECONOMIC FACTORS IN POPULATION GROWTH Bela Csikos-Nagy and Douglas Hague (editors) THE ECONOMICS OF RELATIVE PRICES Bela Csikos-Nagy and David G. Young (editors) EAST-WEST ECONOMIC RELATIONS IN THE CHANGING GLOBAL ENVIRONMENT Marcello de Cecco and Jean-Paul Fitoussi (editors) MONETARY THEORY AND ECONOMIC INSTITUTIONS Leon H. Dupriez and Douglas Hague (editors) ECONOMIC PROGRESS (Second Edition by Austin Robinson) Martin S. Feldstein and Robert P. Inman (editors) THE ECONOMICS OF PUBLIC SERVICES Armin Gutowski, A. A. Arnaudo and Hans-Eckard Scharrer FINANCING PROBLEMS OF DEVELOPING COUNTRIES Karl Jungenfelt and Douglas Hague (editors) STRUCTURAL ADJUSTMENT IN DEVELOPED OPEN ECONOMIES T. S. Khachaturov and P. B. Goodwin (editors) THE ECONOMICS OF LONG-DISTANCE TRANSPORTATION Pierre Maillet, Douglas Hague and Chris Rowland (editors) THE ECONOMICS OF CHOICE BETWEEN ENERGY SOURCES Edmond Malinvaud and Jean-Paul Fitoussi (editors) UNEMPLOYMENT IN WESTERN COUNTRIES R. C. o. Matthews and G. B. Stafford (editors) THE GRANTS ECONOMY AND COLLECTIVE CONSUMPTION Franco Modigliani and Richard Hemming (editors) THE DETERMINANTS OF NATIONAL SAVING AND WEALTH Josef Pajestka and C. H. Feinstf'in (editors) THE RELEVANCE OF ECONOMIC THEORIES Mark Perlman (editor) THE ECONOMICS OF HEALTH AND MEDICAL CARE THE ORGANIZATION AND RETRIEVAL OF ECONOMIC KNOWLEDGE Austin Robinson, P. R. Brahmananda and L. K. Deshpande (editors) EMPLOYMENT POLICY IN A DEVELOPING COUNTRY (2 volumes) Paul A. Samuelson (editor) INTERNATIONAL ECONOMIC RELATIONS Christian Schmidt (editor) THE ECONOMICS OF MILITARY EXPENDITURES Christian Schmidt and Frank Blackaby (editors) PEACE, DEFENCE AND ECONOMIC ANALYSIS Joseph E. Stiglitz and G. Frank Mathewson (editors) NEW DEVELOPMENTS IN THE ANALYSIS OF MARKET STRUCTURE Richard Stone and William Peterson (editors) ECONOMETRIC CONTRIBUTIONS TO PUBLIC POLICY Nina G. M. Watts (editor) ECONOMIC RELATIONS BETWEEN EAST AND WEST ECONOMIC GROWTH AND RESOURCES Edmond Malinvaud (editor) 1 THE MAJOR ISSUES R. C. O. Matthews (editor) 2 TRENDS AND FACTORS Christopher Bliss and M. Boserup (editors) 3 NATURAL RESOURCES Irma Adelman (editor) 4 INTERNATIONAL POLICIES Shigeto Tsuru (editor) 5 PROBLEMS RELATED TO JAPAN HUMAN RESOURCES, EMPWYMENT AND DEVELOPMENT Shigeto Tsuru (editor) 1 THE ISSUES Paul Streeten and Harry Maier (editors) 2 CONCEPTS, MEASUREMENT AND LONG-RUN PERSPECTIVE Burton Weisbrod and Helen Hughes (editors) 3 THE PROBLEM OF DEVELOPED COUNTRIES AND THE INTERNATIONAL ECONOMY Victor L. Urquidi and Saul Trejo Reyes (editors) 4 LATIN AMERICA Samir Arnin (editor) 5 DEVELOPING COUNTRIES STRUCTURAL CHANGE, ECONOMIC INTERDEPENDENCE AND WORLD DEVELOPMENT Victor L. Urquidi (editor) 1 BASIC ISSUES Silvio Bomer and Alwyn Taylor (editors) 2 NATURAL AND FINANCIAL RESOURCES FOR DEVELOPMENT Luigi Pasinetti and Peter Lloyd (editors) 3 STRUCTURAL CHANGE AND ADJUSTMENT IN THE WORLD ECONOMY ECONOMY John H. Dunning and Mikoto Usui (editors) 4 ECONOMIC INTERDEPENDENCE The first fifty lEA conference volumes published by Macmillan are available as a set. Please see the copyright page for information on Series Standing Orders. The Economics of Public Debt Proceedings of a Conference held by the International Economic Association at Stanford, California Edited by Kenneth J. Arrow and Michael J. Boskin M in association with the MACMILLAN Palgrave Macmillan PRESS © International Economic Association 1988 Softcover reprint ofthe hardcover 1st edition 1988 978-0-333-46815-9 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended). or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33-4 Alfred Place, London WC1E 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1988 Published by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world British Library Cataloguing in Publication Data The economics of public debt: proceedings of a conference held by the International Economic Association at Stanford, California.-(Macmillan/IEA; No. 85). 1. Debts, public 2. Economic development I. Arrow, Kenneth J. 11. Boskin, Michael J. III. International Economic Association 336.3'4 HJ8030 ISBN 978-1-349-19461-2 ISBN 978-1-349-19459-9 (eBook) DOI 10.1007/978-1-349-19459-9 Series StandiDg 0nIer H you would likc to rcccive future titIes in this series as they are publisbcd, you can make usc of our standing order facility. To place a standing order please contact your bookseller or, in case of difficulty, write to us at tbe address below with your name and address and the name of the serics. Pleasc state with whicb title you wisb to begin fOur standing order. (H you live outside the UK. we may not have thc rights for your area, m whicb case we will forward your order to the publishcr concemed.) Standing Order Service, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire, R02l 2XS, England. Contents Acknowledgements vii The International Economic Association viii List of Participants x Abbreviations and Acronyms xii Introduction Kenneth J. Arrow and Michael J. Boskin xiii PART I PUBLIC DEBT AND MACROECONOMICS 1 Deficits. Monetary Policy and Real Economic Activity Robert Eisner and Paul J. Pieper 3 Discussion 39 2 On tbe Relevance or Irrelevance of Public Financial Policy Joseph E. Stiglitz 41 Discussion 75 3 Concepts and Measures of Federal Deficits and Debt and tbeir Impact on Economic Activity Michael J. Boskin 77 Discussion 112 4 Optimum Fiscal Policy wben Monetary Policy is Bound by a Rule: Ramsey Redux Edmund S. Phelps and Kumaraswamy Velupillai 116 PART II PUBLIC DEBT AND EQUITY 5 Public Debt and Intergeneration Equity Richard A. Musgrave 133 v vi Contents Discussion 146 6 Debt Burden and Intergeneration Equity Toshihiro Ihori 149 Discussion 191 PART III ASPECTS OF PUBLIC DEBT THEORY AND PRACTICE 7 Debt and Taxes in War and Peace: The Closed Economy Case J. S. Flemming 201 Discussion 224 8 Public Debt and Fiscal Policy in Developing Countries Vito Tanzi and Mario I. Blejer 230 9 Benefits and Burdens of Indexed Debt: Some Lessons from Israel's Experience Ephraim Kleiman 264 Discussion 287 10 Debt, Wealth and the Rate of Growth: An Exercise in Equilibrium Dynamics Stefano Gorini 292 Discussion 309 Index 311 Acknowledgements The International Economic Association Conference on the Economics of Public Debt was made possible through the generous support and guidance of the Center for Economic Policy Research, the Koret Foundation, and the Rockefeller Foundation. Their assistance was an invaluable resource to the Programme Committee. We also wish to thank Stanford University for its hospitality and cordiality in serving as the site of the conference. The International Economic Association expresses its thanks to the International Social Science Council under whose auspices the publications programme is carried out and to UNESCO for its financial support. * PROGRAMME COMMITIEE Professor Kenneth J. Arrow Professor Michael J. Boskin Professor Jean-Paul Fitoussi vii The International Economic Association A non-profit organisation with purely scientific aims, the International Economic Association (lEA) was founded in 1950. It is in effect a federation of national economic associations, at present fifty-eight in all parts of the world. Its basic purpose is the development of economics as an intellectual discipline with an international approach which recognises a diversity of problems, systems and values in the world economy. The lEA has, since its creation, tried to fulfil that purpose by promoting the mutual understanding of economists from the West and the East as well as from the North and the South through the organisation of scientific meetings and common research programmes and by means of publications of an international character on problems of current importance. During its thirty-seven years of existence, it has thus organised seventy-nine specialists' round-table conferences on topics ranging from fundamental theories to methods and tools of analysis and significant problems of the present-day world. Eight triennal World Congresses have also been held, which have regularly attracted the participation of a great many economists from all over the world. The proceedings of all these meetings are published by Macmillan. The Association is governed by a Council, composed of representatives of all member associations, and by a fifteen-member Executive Committee which is elected by the Council. The present Executive Committee (1986-9) is composed as follows: President: Professor Amartya Sen, India Vice-President: Professor Bela Csik6s-Nagy, Hungary Secretary General: Professor Jean-Paul Fitoussi, France Treasurer: Professor Luis Angel Rojo, Spain Other members: Professor Kenneth J. Arrow, USA (President, 1983-1986) Professor Edmar Lisboa Bacha, Brazil Professor Ragnar Bentzel, Sweden Professor Oleg T. Bogomolov, USSR Professor Silvio Bomer, Switzerland viii The International Economic Association ix Professor P. R. Brahmananda, India Professor Phyllis Deane, United Kingdom Professor Luo Yuanzheng, China Professor Edmond Malinvaud, France Professor Luigi Pasinetti, Italy Professor Don Patinkin, Israel Professor Takashi Shiraishi, Japan Adviser: Professor Tigran S. Khachaturov, USSR General editor: Mr Michael Kaser, United Kingdom Adviser to General Editor: Professor Sir Austin Robinson, United Kingdom Conference Editor: Dr Patricia M. Hillebrandt, United Kingdom The Association has also been fortunate in having secured the following outstanding economists to serve as President: Gottfried Haberler (1950-3), Howard S. Ellis (1953-6), Erik Lindahl (1956-9), E. A. G. Robinson(1959-62), G. Ugo Papi(1962-5), PaulA. Samuelson (1965-8), Erik Lundberg (1968-71), Fritz Machlup (1971-4), Edmond Malinvaud (1974-7), Shigeto Tsuru (1977-80), Victor L. Urquidi (1980-3), Kenneth J. Arrow (1983-6). The activities of the Association are funded mainly from the subscriptions of members and grants from a number of organisations, including continuing support from UNESCO.