Deficits and Intergenerational Welfare in Open Economies

Abstract

This paper deals with public debt in open economies, extending Diamond's overlapping generations model to deal with a small openeconor as well as an international eciuilibrium of two large economies. It focuses on the intergenerational welfare redistributions caused by an increase in the public debt triggered by a period of government budget deficit, and shows that these effects are markedly different in open and closed economies. The interplay between the deficits in the government budget and the current account is also analyzed. Here, it is shown how a single period with a deficit in the government budget can be followed by a seciuence of periods with a deficit in the current account.