A Study On Scale Of Public Debt

The determination of the public debt scale (PDS) is a difficult, contentious problem in the academia and it is closely connected to the health of a country's public finance and its economy. One central problem is:how can some countries'economy operate well with heavy debt burden while other countries become worried burdened with much less debt? The governments and academia have not yet come up with a satisfactory explanation to this dilemma. In "On the Determination of the Public Debt", Barro (JPE,1979) asserted that some explaining variables related to public debt seem to remain constant. However, in the last century the issuing of counter cycle debt has led to debt accumulation which is beyond the prediction of conventional theory. Under such circumstance, we need to reconsider other variables in the determination of debt scale as to ensure the consistency of government policy.Nowadays, Public debt has gone far beyond government borrowing:macroscopically it has become a major tool for the government to implement its monetary and fiscal policy; microscopically it has become an important part of family wealth. Thus, against the backdrop of current financial crisis and the coexistence of economic cooperation and competition, accurately determination of the public debt and an objective and effective quantity standard in such determination process are imperative for both the use of public debt as a financial tool and for the prevention of public debt related risks.After a thorough literature review, following problems are identified in terms of Public Debt Scale (PDS):(1) Most of the scholars adopted an EU standard based, static comparison analysis method called "international warning line". However, the nature of public debt is dynamic, which calls for a dynamic analysis operative framework; (2) No objective, scientific standard on public debt scale has been provided, such as the scale of public debt-to-GDP ratio; (3) Microscopic variables need to be included in the determination of public debt scale in China, such as Household Aaccounts Constraint and Government Budget Constraint; (4) No study has taken into consideration the natural public debt solvency and system transition from a micro analysis perspective.To address these problems, this paper mainly discussed a dynamic analysis model of public debt based on micro-analysis, and divided natural public debt solvency into different levels. Firstly, the author constructed a micro-analysis foundation of eternal family account and over period dynamic family account. Secondly, the author used this foundation and public finance constraint theory (which is used to explain public debt scale macroscopically) to explain the impact of a series of variables on PDS and determination mechanism. These variables include the expectation of family account, behavioral preference, utility maximization, endowment and counter-endowment effect between generations and other macro-ecomomic variables such as financial deficit, tax revenue, public expenditure, economic growth and real interest rate. Thirdly, system simulation was used to check the validity of the above model's validity and robustness. Finally, the author used a Panel Threshold Model (PSM) to find out the threshold values of PDS of several countries.Chapter One, introduction. This chapter includes research background, current development, research perspective and research method, main innovations in this research, research hypotheses and definition of related concepts.Chapter Two, a literature review of microscopic theoretical foundations of PDS. The author provides PDS determination mainly from two ways:one is from a family account perspective and the other is from the connection between PDS and over-period, dynamic family account constraint and debt neutrality. After a thorough analysis of extant microscopic theories, the author pointed out theoretical gaps which need to be further bridged.Chapter Three, a study on microscopic theoretical foundations of PDS. In this part the author extended the general constraint model of family account on PDS into a dynamic model and broadened our understanding of microscopic mechanism of Barro-ricardian invariance theorem; Secondly, the author analyzed the relationship between the tangible family asset, intangible family asset and PDS; Thirdly, the author analyzed the effect on PDS of endowment surplus and counter-endowment between generations, laying the foundation for the macroscopic determination of PDS.Chapter Four, a literature review of macroscopic theoretical foundations of PDS. The author introduced the recent development of dynamic analytic frameworks in the determination of PDS, sorted out key variables in the determination process, analyzed the relationship between system transition, development difference and the PDS, and then found out theoretical support of microscopic analysis in the macroscopic determination of PDS.Chapter Five, a macroscopic theoretical study on PDS based on microscopic analysis. In this chapter, the author adopted a microscopic determination framework on the basis of microscopic analysis; undertook a theoretical study on the determination mechanism of the impact of natural debt solvency and system transition on PDS; used system simulation to test the validity and robustness of the theory proposed by the author.Chapter Six, an empirical study to test the PDS determination theory above. Combined with the theory in Chapter Five, a threshold panel model was used to calculate the threshold value of PDS of sample countries, which can be used as a objective standard in the setting up of PDS.Chapter Seven, research conclusion. Based on the conclusions of above chapters, the author came up with a general conclusion of the whole research, and provided directions for the future studies.After theoretical and empirical study, major findings include:(1) the microscopic foundation is necessary in the determination and explanation of PDS. (2) PDS needs to be anchored by behavioral preference, wealth and welfare state reflected in family account, all of which provided a natural set of standard. (3) Tangible assets, its formation, endowment and counter endowment between generations formed the foundation for the advancement of PDS. (4) The dynamic framework of PDS is constrained by both family account and government financial account, and consists of constraint function, objective function and state function. There is also interaction effect between variables related with family account and those related with public financial account. (5) The essence of dynamic analysis framework based on microscopic analysis is the PDS's natural debt solvency and systems transition based explanation. (6) Natural debt solvency explains how family account, fiscal revenue and expenditure and economic development co-determine the PDS; the explanation provided by the system transition model has filled the gap created by "natural debt solvency" and proved the role of functional transition of PDS in economic and social development. (7) Empirically, the nonlinear nature of PDS has been again confirmed, and we've got the threshold value of 42.224% from sample countries.Main Innovation:(1) A thorough review of PDS determination literature and a thorough study and discussion of macroscopic PDS determination theory is based on microscopic analysis. The author confirmed the necessity and feasibility of studying PDS from a micro-level family account. The author developed a dynamic analytical framework based on micro-analysis, which consists of constraint function, objective function and state function, so the model improved the current static model featuring "international warning line"(2) A investigation of the nature of PDS dynamic analytical model, The author holds that the natural debt solvency (NDS) of PDS and the transitional PDS explanation model together formed an operative dynamic model of PDS. By the use of system simulation, the author tested the validity and robustness of NDS of PDS. At the same time, the transitional PDS explanation model has complemented the explanations for the invalid areas of simulation results.(3) Because of the nonlinearity of PDS, this research used a newly developed panel threshold model to calculate the threshold value of sample countries'PDS. After taking into considerations the relations between economic growth, fiscal revenue and expenditure and the financial capacity, the author provided an accurate standard for the determination of PDS of different countries under different conditions, so that they can make references in their economy planning and fiscal policy formulation.