Abstract Various scholars have studied the results on the public debt held in order to discuss and analyze performance. From the government’s perspective, the answer to the core issue of public debt performance study is: the public debt performance is function of the long run equilibrium of the economic growth and of the short run equilibrium of the business cycle fluctuations. The main measurement of the long run equilibrium of the economic growth is in the objective function process. The public debt depends on their performance brought about economic and social variables. The main short run equilibrium of the public debt makes the business cycle fluctuations, and reflects timely economic regulation and controls functions, as convergence of monetary and fiscal policies through an ideal way. Finally, studies gradually deepen theoretical model, and proceed to Empirical Research in future.
Key Words Public Debt, Performance, Economic Growth
What kind of relationship exists between country’s public debt (bond) and economic growth in the end? Macroeconomic scholars have been trying to solve the problem. Clearly speaking, the measurement debt level of performance is an analysis of its economic growth in the objective function role. The academic decades of studies, from different angle, gradually have formed the theoretical lines, including Keynesian theory, the classical theory (Leaner, 1948), the rational expectations theory (Ricardian Equivalence Theorem), bonds conditioning theory (Barro Taxes Smoothing Hypothesis), as well as public choice theory (advocated adoption of the constitutional amendment to develop a balanced budget provisions).
In order to accurately identify the relationship between economic growth and public debt performance, this study defines the scope of the internal debt, excluding debt, which does not include the right of local governments to discuss debt. Bonds associated with some concepts, such as the scale of treasury bonds, the deficit, budget, fiscal, taxation, the next phase will examine some clearly defined. Assume that the major achievement is the attention to effectiveness, efficiency, effectiveness and equity (4E) (Flynn, 1997) in the performance management system, the issue of public debt to financial performance behavior is a part of this process, including the operation and the fiscal and monetary policies of double performance. Through the study of economic growth as a guide to assess the middle relate to economic, social development indicators with the relationship between variables, studies the behavior of bond performance.
The basic framework of the research is to study the various scholar results on the public debt that have been held to discuss and analyze performance. From the government’s perspective, the answer to the core issue of public debt performance study is: the public debt performance is function to the long run equilibrium of the economic growth and to the short run equilibrium of the business cycle fluctuations. The main measurement of the long run equilibrium of the economic growth in the objective function process, the public debt depends on their performance brought about economic and social variables, the main short run equilibrium of the public debt is to make the business cycle fluctuations, and reflect timely economic regulation and control functions, as convergence and monetary and fiscal policies are an ideal way. Finally, in future studies gradually deepening theoretical model, and proceed to Empirical Research.
2 Foreign Literature Study Summarized and Analysis
2.1 Classical Scholar School
A. Smith, D. Ricardo and Say found laissez-faire doctrine is the base of classical school of fiscal policy. And they considered that since the welfare section was motivated by market mechanisms, which operate the original dynamic penalized, and the economic system by the market mechanism into full play, which can automatically achieve full employment balance. The government budget is only a balanced budget is the best estimate, if the public debt is for government consumption. Its effects reduced the existing industrial capital. Say (1803) also emphasized: the best financial plan is the least expensive plan. The best tax is the people’s tax burden at least.
The limitations of classical scholars in the 19th century capitalist boom, and did not show a serious lack of effective demand caused by the economic crisis. The world economy to the demands of government control was not obvious. So the performance bond was in a narrow definition of “living within our means”, “in order to achieve a fixed extension.” And also in the macroeconomic research areas, the awareness of public debt still remained in private debt with the confusion, the one-sided view that the issuance of bonds was transferred to the national consumption of the way to its people.
2.2 Keynesian Theory
In 1929 the world economic crisis occurred, the Keynesian school of scholars advocated a deficit budget, issuing national debt to replace taxation, government departments should make use of a deficit budget or expansion of financial policy and the private sector to make up for inadequate investment, to stimulate effective demand and the potential to reach a considerable level of total output, while full employment had reached the economy of the States. So we should no longer continue to use the classical school advocates to restrict government authority and a balanced budget.
Lener(1948) has made a theory of functional finance, which means government revenue and expenditure should regardless of sound financial principles to be evaluated, and weigh the amount of income generated by economic benefits, and need not worry about whether the purpose is to enable them to aggregate demand and the revenue debts that are the essence of the use of national resources, which are considered as the same.
Clower (1965), Patinkin (1965), Barro and Grossman (1971) have all set in different circumstances, the analysis of the national debt to make up for the departments of public expenditure. Buchanan (1958) that the public debt is the behavior of government consuming social resource. If the public debt is not purchased any additional burden, it is not because the government issued debts for replacement of public expenditure and the burden of cost; but today debt is future debt service, it takes from the next generation of people to afford. Therefore, the burden of public debt is inter-generational transfer has been the Cairns School and other academics a point of controversy.
The market economy is efficient. And the need for effective governance is the achievement levels of content. In a word, Efficiency is only one component of performance. In inflation, country use bonds in the form of investment, production and social realities frontiers are forefront of potential production frontiers closely. And the surplus production capacity of the state would purchase as public and quasi-public goods for the production.
The investment bonds are to bring the fiscal deficit. The deficit here, which we borrow Samuelson and Nordhaus’ definition, contains a structural deficit and the cyclical deficit. To make up for the deficit, it relates to the government’s debt burden as Buchanan, will be a series of issues such as revenue into the discussion.
2.3 Rational Expectations Theory
New Classicists have been against the burden of public debt issues different from the address Keynesian school of thoughts. Barro (1974) has built a model of the inter-generation under the rational expectations. It regards government borrowing as the burden of people in the future. If we consider that the future burden of taxes or debt and the transfer of assets, which are accompanied by the tax-cut issue or bonds, both of them for the consumer and the impact can be offset. Because the people know the tax cuts now, the future will be tax increases. Rational consumers will increase savings to meet future debt service for bonds of interest, and will be impossible to increase spending though immediate tax cut. Therefore, the nominal rate will also rise. In other words, the bonds are not considered as the increase in net wealth for people. The established government spending is to use tax to change bond, and its effects on the economy are the same.
Barro and Ricardo research the relationship between revenue and debt, and reach the inter-generational bonds between the long run equilibrium, and to some extent, solve the inter-generational transfer taxes problems. But the settlement of the issue is based on a balanced economic and a social development assumption, which are oriented from a financial and economic endogenous variable itself for the analysis. And there are no account of external variables and the confidence of the people of the impact of the international economic changes.
2.4 Public Debt Regulation Theory
Rational government in the fiscal period-optimal choices, such as the Barro (1979), Lucas and Stokey (1983) advocates that the government in the pursuit of the taxes levy distort the cost or burden on the smallest over-the principle. This search for the optimal period of the tax burden across the structure, budget deficits contribute to the maintenance of the tax effect, namely, the so-called “Tax-chains hypothesis”. The government would minimize the tax burden on the over-the principle of choice taxation policies, so total tax rate remains at a fixed level in order to ensure a balanced budget. When they are not expected to emerge expenditures, budget deficits appear. Expenditures for public taxes or issue public debt factoring, Barro (1979), Lucas and Stokey (1983) who based on the tax-chains hypothesis have proposed regulation bonds microprocessor technology that the government policy of the optimum Constancy political spending to increase total tax rate means the replacement. Interim government increase expenditures, but gather a public debt issue, and not adjust total tax rate or tax revenue. Tax-chains on assumptions of the empirical results, and foreign literature showing support (such as Barro, 1981, 1986) and without the support with two Regardless of the results.
Barro etc. following study the construction of the inter-generational structure of the model further raised the taxes smoothing assumptions. This is far, studies was the biggest achievement recognized by the theoretical results. However, in different countries differences, empirical results show that the model for the economic development level and stage, the confidence of the people, and the debt stock of such considerations remain to be improved.
2.5 Public Choice Theory
Public Choice School (Buchanan and Wagner, 1977), assuming that the voters have fiscal illusions, the renovation will not underestimate the tax debt burden. Politicians from the welfare section of the test ballots prefecture is the welfare section with it, and advocates a public debt issue to replace the tax increase. Therefore the burden of contemporary way to bond transfers to future generations. Also, from a political angle to the business cycle instituted, the ruling party to secure power, will be to expand spending and tax cuts stimulated the economy, which causes the deficit may rise (Nordhaus, 1990), when the government debt follows amplification.
Public choice theory applies political science into the performance measurement of public debt, while the confidence of the public is paid sufficient attention by this theory. However, the currency is not clearly explained by public choice, while coping with the new economic and political system of different changes after public debt for political cycle, the business cycle and economic growth in the role, not yet published the results update.
In summary, the study concludes that the public debt performance from the national level is necessary to economic growth and full employment. As fiscal policy tools, the public debt performance is reflected by raising construction funds to make up for the budget deficit and regulating the money supply functions. Public debt performance on its own is the relationship between the tax burden and the public debt to repay the mentality; meanwhile the evolution of the political system is necessary to consider the content. But the study found that the common principle of public debt is very difficult to extract. How to understand public debt, operate public debt and distribute public debt, is a system works.
3 Domestic Literature Summarized and Analysis
The majority of domestic scholars follow the Keynesian theory. Their study aspects contain the size of the debt, deficit and debt investment alert level for national economic development role.
Peng zhiyuan (2002) study, that the Keynesian theory includes short run and long run analysis, in a fairly long period of time should step up the issuing of public debt to expand domestic demand and to support structural adjustment and reform.
Liu Shibai (2000), China’s public debt expenditure is mainly to resolve the 1998 Asian financial crisis, caused by insufficient domestic demand and economic transformation of the structural imbalances, strengthen the construction of infrastructure facilities and so on.
Liu Bangchi (2001), the public debt as a lending relationship shows that the borrowing appropriate scale, offset deficits, reasonable distribution of social resources, optimizing the economic structure, guide macroeconomic played an enormous role. To measure the scale of public debt internationally recognized indicators, with various national level of economic development, historical background closely combine science is possible to make rational judgments. China’s current government has not yet reached the limits of borrowing; public debt considerable room for expansion, a positive financial policy implementation needs to continue to promote the stable and sustainable economic development.
Ma Shuanyou (2001), Evaluation of the sustainability of the public sector in general theoretical framework, and that the burden rate bonds steady, consistent sustainable path of the deficit depends on economic growth, whose degree depend on exports, export growth, exchange rate fluctuations, inflation, the domestic and external debt rate of base money states internal and external variables. According to the financial risk matrix estimated the government’s public debt, which found the current public sector deficit was only a small space for expansion, the proactive fiscal policy is not sustainable. Estimates of the proactive fiscal policy burden rate bonds path and time of financial solvency, the financial future must also be timely adjustment policies to restore sustainability.
Ma Shuanyou, Yu Hongxia and Chen Qiqing (2006) summarized the literature at home and abroad on the basis of building a public debt with the interest rates, inflation dynamic stability analysis of theoretical framework. And then they use monthly VAR model checking the balance of public debt and short-term interest rates, and inflation. It found the relation between public debt and actual interest rates, inflation which have had some effect, but the effect can be neglected smaller. It drew a conclusion that since the reform and opening up China’s financial had been stability of the whole.
Jia Kang, Zhao Quanhou (2000), both ancient and modern empirical evidence and material to support the following basic judgment: the use of public debt can have a positive impact and the possible negative impact the economy. And the external impact of the changes in the scale of public debt is closely related, showing some function relation. Therefore, regardless of the theoretical study on the economic or practice, there is a reasonable ways to determine the size of the public debt. In different countries, and a country in different stages of development or development period, the appropriate scale can vary, but in real life, its concrete amount is so far unable to accurately determine. However, these bonds can not deny appropriate scale (or appropriate size range) and the objective existence.
China Association bonds, “the bond market” discussion group (2002) commented on China’s development of the bond market, bond circulation continuously improve and expand the room for issuing treasury bonds. The circulation of bonds to raise the policy recommendations include: adjusting to raise the issue of treasury bonds in circulation ratio, the issuance of treasury bonds gradually shifting target institutional investors, improve the structure of the national debt, as well as incremental steps to bring the bond market segmentation connectivity.
Liu Yingqiu (2001) has proved and explained China’s current rate of deficit and debt rate and the warning line. Focusing on this theme, the authors have analyzed and explained the “three departments” economic conditions of the debt-deficit model; then the Chinese balanced and dynamic balance deficit and the debt rate decision on the rates of the theoretical analysis; finally, the debt-deficit model based on experience from the EU experience. By empirical analysis, it studies and reveals the national economy and China’s current stage of development suited to the deficit and the debt rate and the rate warning.
The main domestic research results have a strong historical background, the 1998 -2003 Chinese economy suffering from the 1997 Asian financial crisis and its economic transformation. Therefore the government liabilities (deficit) are in the form of expanding domestic demand and maintain market liquidity and economic vitality. The public debt performance, and whether the size of the debt is reasonable that the reasonable standard of reference light is that the debt service ratio, the debt rate and the rate of the three major indicators of indebtedness. Domestic economic circles on this issue, in light of China’s own situation launched a controversy that the above academic opinion is then raised.
But through insight into foreign bonds in the study, we can clearly found that the so-called scale of the debt limit is based on the different angles of consideration. Not simple, with concrete economic endogenous variable interpretation. From China’s perspective, the confidence of the people is no doubt public debt, followed by public debt should be reflected in the performance of balanced long-term economic growth and the accumulation of the current deflationary expansion. In addition, the public debt performance on the monetary policy in China also is benefits of almost no expression of these further studies. There is so fewer Chinese scholars, such as Hengfu Zou applying the international perspective, and exploring the theoretical public debt performance. Yinyi Qian (2007) once in a report said that international and historical perspective of contemporary Chinese economists is the standing stage.
4 Future Research Frameworks — Economic growth and Business Cycle
The business cycle and economic growth is macroeconomic research eternal theme, as well as the core objective function of public debt study. As short run and long run equilibrium being different, sometimes convergent features, we should distinguish between treated in the study of public debt performance measurement. The literatures summarized above mentioned and discussed the content of both can be divided into business cycles and economic growth in the objective function and the vast majority of issues can be balanced with short run equilibrium and long run equilibrium standards for balanced judgment.
The function of public debt covers the deficit, financing, regulate currency. This is the classic definition of macroeconomic theory, but the expansion of the level of public debt performance after the attention and coordination aspects relating to the effectiveness, efficiency, effectiveness and equity issue, the four dimensions of the performance of the Complete Works of public debt in different government strategies and environmental performance, the Complete Works the subset been given different weights after the formation of the ultimate achievement Frontier. The study discussed in the next, will be carried out gradually according to the objective function to determine the public debt performance Frontier theoretical research.
4.1 Business cycle – Weaken the Government’s Financial Performance
The business cycle is output, employment and prices of short run fluctuations that comes out is the basic form of inflation and deflation.
4.1.2 Tightening pressure: the deficit performance
The direct consequences of deflation may be induced by economic recession, insufficient effective demand, and real production within. The direct effect of issuing public debt is to promote production up to the potential production frontier, through national investment and consumption in the form of demand driven. Of course, these contain multiplier effect and the effects of acceleration.
More classic discussion mainly focused on the efficiency levels, from the perspective of performance. Deflation would weaken the state financial control of the economy, if it does not get liabilities in the form of the future introduction of economic resources. Furthermore, the Sunk Cost is incalculable by economic and social statistics accounting method. From the point of view of effectiveness, human resources and technological progress advantages, below the long run potential output and the real will push up production costs, but the decline in the price factor and the rising costs, the economy will enter a vicious cycle of the abyss. From a social equity and institutional change perspective, the deflation in some extent is to reduce the people’s living standards and enthusiasm for work, and society at the lower of the public will feel that the quality of life is downing and being employment is hard. Public debt will play a key role in the social security of the people with the emotional stability, which transfers payments could further stimulate consumption flexible low necessities of production. In a short, the multiplier effect will be very obvious. While such a public debt is essentially a savings to the debt, rather than the current income to the overdraft through bonds to fiscal and monetary policies linked. Popular saying is that the people are worried about the consequences of the consumer savings. The state is to help the people consume with the national credit and reduce the people of the risks.
4.1.2 Inflation pressure: excess liquidity
Excess liquidity is inflation characteristics. The strong demand of currency links with the depreciation. A theory concludes that inflation is the ideal way to people plundered by State. The problem now is that countries have always existed in the circumstances, any nation’s fiscal and financial decision-making, it is impossible for that purpose. However, we must recognize that inflation will indeed lead to the people’s assets shrink, and even countries not unscrupulously tendencies, but can not be excluded oligarchic the opportunity to plunder populations. Then the public debt is really to speculative borrowing, too much for the stock of monetary is recovery by bonds market. Through an open market operation, the stability of long run public is to determine interest rates, and market interest rates provided the correct lever.
Apart from the above efficiency level, when public debt performance in inflation is that the state can take advantage of economic growth in excess of advantages, make up for the austerity period of the debt, reduce the public debt being expected to pressure. In addition, transfer payments in the form of guaranteed minimum living standards are timely and appropriate to address housing, health and education problems.
4.2 Economic Growth
Economic growth in the long run equilibrium, inevitably they will face short run fluctuations in the business cycle. The theory of economic growth has been the core research aspect since its inception, especially in the past 40 years, the economists to discuss economic growth in the long run mechanism has tried to macroeconomic policy choices, to iron out the business cycle of excessive inflation and squeeze, the faster the economy rate of growth, price stability, full employment and balance of payments. Public debt in this respect is the fiscal and monetary policies of the lubricant.
In this sense, the public debt performance is not only the size of the target, but also taxation, inter-generational balance of the tax burden, political stability and political decision-making related to the situation. It can be said that no single theory, which are insufficient to support bonds discuss performance and long run economic growth balanced relationship. From a single fiscal and monetary policy terms, the short run effects are the manipulation of treasury policy is targeted at the real or imminent situation. But with historical and long run vision, a comprehensive look at public debt and economic growth is the objective function, in order to provide a scientific basis for decision-making.
The study and research of public debt performance need a comprehensive and international perspective. Construction of the theoretical model is not only in China’s national conditions, but should be the mainstream of the international research directions converge further concern with regard to the universal significance. Economic growth and the business cycle, long run equilibrium and short run equilibrium, efficiency and performance all constitute the main theoretical framework logical starting point. In the follow-up study, this research will continue over the framework, theoretical and empirical derived combination of extensive and in-depth advance.
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He Daixin Ye Zirong
(National Academy of Economic Strategy of CASS)