HE Daixin：The Theory of Appropriate Size of Public Debt: Model Characteristics and Non-linear Simulation

Abstract：Due to the default risk and the lack of alarm signal, there is an essential task to research the appropriate size of public debt.Based on micro frame of the endogenous growth model, this paper formulates a theoretical model of the appropriate size of public debt by the logic of fiscal sustainability.Considering the constraint of capital formation, financial transfer payment effect, and fiscal sustainability, we found a stable equilibrium path for the appropriate size of public debt.To further analyze the policy implications of the theoretical model, we apply simulation methods to verify the nonlinear “fins” steady state characteristics in the theoretical model.That means the public debt scale which meets the demand of government financing can converge with economic fluctuations.Meanwhile, the economic growth will make the appropriate debt scale more resilient.In other words, to some extent this paper demonstrates that the fundamental solution to the debt crisis is still to promote economic growth, rather than fiscal austerity.

Key words： Size of Public Debt    Appropriate Debt Size    Endogenous Growth Model    Fiscal Sustainability

source:Finance & Trade Economics ,No.5,2015