Taxation, Debt and Relative Prices in the Long Run: The Irish Experience

This paper examines the effects of debt and distortionary labor taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model we demonstrate that higher public debt, associated with higher taxation, contracts labor supply in both traded and nontraded goods sectors. Relative prices move inversely with relative supply shifts which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, we find statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices.

The real exchange rate is defined as the relative price of nontradables and tradables. An index of the relative price is constructed for the U.S. and used to explain net exports. The index appears to perform better in explaining net exports than a comparable purchasing power parity real exchange rate. The relative price of nontradables, in turn, is shown to be cointegrated with a set of variables that drive the demand for and supply of nontradables. These variables capture long-run structural and demographic changes of the U.S. economy, such as the increased demand for medical services.

Un réexamen du modèle de Balassa-Samuelson en présence de taux de marge endogènes Cet article s’intéresse au rôle des variations des taux de marge lors de la transmission des chocs de productivité sectorielles et de dépenses publiques au prix relatif des biens non échangeables. Le modèle de Balassa-Samuelson dans lequel le marché des biens est parfaitement concurrentiel suggère que, premièrement, le prix relatif augmente de 1 % suite à une augmentation du rapport des productivités sectorielles de 1 %, et que, deuxièmement, les chocs de dépenses publiques n’ont aucun impact sur le prix relatif à long terme. Appliquant les méthodes de cointégration en panel à un groupe de quinze pays de l’OCDE, nos résultats empiriques rejettent ces deux prédictions. Au contraire, nous montrons qu’une hausse de la productivité relative entre les deux secteurs de 1 % augmente le prix relatif des biens non échangeables de seulement 0.70 % et qu’une augmentation de la part des dépenses publiques dans le PIB de 1 % entraîne une hausse du prix relatif d’environ 1 %. Cet article montre ensuite que ces faits empiriques peuvent être répliqués par un modèle d’économie ouverte à deux secteurs dans lequel les changements de la composition de la demande en biens non échangeables génèrent des variations endogènes des taux de marge. Classification JEL : E20, E62, F31, F41.

This dissertation consists of two chapters. The first chapter addresses the role of trade barriers in explaining differences in the relative prices of tradables across countries. The second chapter assesses the quantitative importance of changes in comparative advantage in explaining the changes in the compositions of exports and output in South Korea during its growth miracle. In the first chapter I quantitatively address the role of trade barriers in explaining the cross-country distribution of the price of nontradables relative to tradables. Relative prices of nontradables are higher in rich countries than in poor countries. The standard explanation for this is due to Balassa (1964) and Samuelson (1964), where, in each country, the relative price of nontradables is equal to the inverse of relative productivity, and relative productivity is higher in poor countries. I construct a multi-country model of trade in which countries face asymmetric trade barriers. There are many tradable goods and trade barriers determine the cross-country pattern of specialization across tradable goods. The realized pattern of specialization determines measured productivity in the tradables sector, which determines relative prices. Existing trade barriers account for half of the difference in relative prices between rich and poor countries. In the second chapter, I explore how the evolution of comparative advantage can explain the changes in the compositions of exports and output that occurred in South Korea during its growth miracle. From 1960 to 1995 manufacture’s share

Imperfect mobility of labor across sectors: a reappraisal of the Balassa–Samuelson effect

This research aimed to explore the sustainability of public debt with changes in the South African regime from 1960 to 2020. Annual data was obtained from the South Africa Reserve Bank, and the Markov-switching autoregressive (MS-AR) model was employed to describe the public debt process in South Africa. Compared to traditional endogenous modelling, the process explicitly allows for the possibility of regime changes. Regime 1 defines the stages of high public debt, and regime 2 describes periods of a downward trend in public debt. The results reveal that in regime 1, there is a 98% likelihood of remaining in high public debt and a lower probability of 1.76% switching to a lower public debt regime. Also, when the system is in a lower debt regime, there is a 98.2% likelihood of remaining in a lower public debt state and a lower probability of 1.74% switching to a higher public debt state. The expected average duration of a period of higher public debt is 56 years, while the average duration of a lower public debt regime is 57 years. This implies that it is only in an extreme event that public debt can switch from a high-debt regime to a low-debt regime and vice versa. Hence, it is suggested that the government implement policies knowing that public debt will not decline suddenly.

This paper develops a multi-country two-sector overlapping-generations model to study the impact of demographic change on the relative price of nontradables and current account balances. An aging population expands the relative demand for nontradables, exerting upward pressure on their relative price (structural transformation), and entails a willingness to save more, as households discount higher survival probabilities, and invest less, as firms face increasing labor scarcity. The general equilibrium reduction of the real interest rate (secular stagnation) dampens the increase in the relative price as savings become less profitable, thus lowering consumption at older ages. The model robustly predicts that faster-aging countries will face greater increases in the relative price of nontradables and unprecedented accumulations of net foreign asset positions (global imbalances) over the twenty-first century.

The Covid-19 pandemic has had a profound impact on European economies, leading to a significant increase in public debt levels. This paper examines the challenges and policy implications of managing public debt and fostering economic growth in Europe post-Covid-19. It provides a conceptual framework by defining and measuring public debt, exploring the relationship between public debt and economic growth, and highlighting the role of public debt in times of crisis. The paper analyzes the impact of Covid-19 on public debt in Europe, including the fiscal response, debt accumulation, and reasons for increased debt levels. It further discusses the challenges posed by high public debt, such as debt sustainability, crowding out private investment, financial stability risks, and constraints on future fiscal policy.
 
 The study then presents policy implications for balancing public debt and economic growth, including fiscal consolidation measures, long-term debt management strategies, prioritizing public investments, implementing structural reforms, considering monetary policy, and fostering international cooperation. Additionally, the paper provides case studies of selected European countries, evaluating their approaches, assessing policy effectiveness, and drawing key lessons and best practices. Finally, the paper concludes with a summary of key findings, policy recommendations for European governments, and suggestions for future research directions.

This study aims to look at the long-term and short-term links between institutions' quality and public debt. The analysis seeks to shed light on two key aspects: firstly, the influence of country-level institutional quality on public debt, and secondly, the duration of the effects or shocks caused by this relationship. This research employs time-series data spanning from 1996 to 2017 to examine the relationship between institutional quality at the country level and public debt in Japan. Various econometric techniques were employed to analyse the determinants of public debt in Japan, including ’The Unit Root Test, Johansen's Co-integration Analysis, Vector Error Correction (VEC) Model, Variance Decomposition, Impulse Response Analysis, Pairwise Granger Causality Test, and The Toda-Yamamoto Model’. The results of the estimation demonstrate a statistically significant correlation between country-level institutional quality and public debt, both in the long and short term. The evidence indicates that factors such as Voice and Accountability (VA), Political Stability (PS), Government Effectiveness (GE), and Regulatory Quality (RQ) have a negative and statistically significant impact on public debt. Conversely, the Rule of Law (RL) and Control of Corruption (CC) exhibit a positive and statistically significant influence on public debt. The occurrence of public debt can frequently be attributed to the insufficient focus of policymakers, which can be attributed to governance deficiencies. Hence, the implementation of public debt management is necessary to mitigate the possibility of default. The findings indicate that it would be advisable for Japan to enact comprehensive policies aimed at mitigating public debt.

Introduction - is there a public debt problem in Italy?, Luigi Spaventa the end of large public debts, Alberto Alesina monetary and fiscal policy coordination with a high public debt, Guido Tabellini the management of public debt and financial markets, Marco Pagano capital controls and public finance - the experience in Italy, Alberto Giovannini public debt and households' demand for monetary assets in Italy, Andrea Bollino and Nicola Rossi.

This report discusses the findings and recommendations of a diagnostic assessment of the quality of public sector debt statistics (PSDS) of Mauritius based on the IMF’s Data Quality Assessment Framework (DQAF) for PSDS. The assessment was undertaken in September 2025 as part of an initiative—funded by the Government of Japan—to strengthen the quality of public sector debt data in select African countries. Mauritius’ public debt is estimated to be 86 percent of GDP at the end of the 2024/25 fiscal year (end of June 2025), having risen significantly over the last five years. According to the PSDS reports of the Ministry of Finance (MOF), the consolidated gross public debt was 64 percent of GDP at the end of December 2019, just before the Covid pandemic. The high public debt levels of recent years have translated into a high risk of sovereign stress according to IMF’s latest debt sustainability analysis of June 2025. Mauritius subscribes to the IMF’s Special Data Dissemination Standard (SDDS) and submits quarterly debt data to the Joint IMF-World Bank Quarterly Public Sector Debt statistics database (QPSD). The quarterly debt data are disseminated in a regular and timely fashion through both the National Summary Data Page (NSDP) of the SDDS, and via the QPSD. In addition, the MOF publish a range of detailed quarterly public sector debt tables on their website. However, the mission found that debt reports could be more comprehensive through the inclusion of all debt instruments and more could be done to meet user needs by clearly presenting revisions, publishing stock-flow reconciliations, improving metadata and ensuring consistency with other macroeconomic statistics. In addition, the legislative and administrative arrangements could be further strengthened, including through the designation of PSDS as official statistics subject to the oversight and safeguards of the Statistics Act. The authorities have accepted the mission recommendations and developed an action plan to implement them in a phased manner.

We develop a two-country, balanced-growth intertemporal general equilibrium model to examine two predictions of the Balassa-Samuelson model, namely that (i) productivity differentials determine the domestic relative price of nontradables and (ii) deviations from purchasing power parity reflect differences in the relative price of nontradables. In our model, the equilibrium relative price of nontradables along the long-run balanced-growth path is determined by the ratio of the marginal products of labor in the tradable and nontradable sectors. The empirical relevance of the Balassa-Samuelson predictions is examined using the Hodrick-Prescott filter to extract long-run components from a panel database for fourteen OECD countries. The evidence indicates that labor productivity differentials do explain long-run, cross-country differences in relative prices. The predicted relative prices, however, are of little help in explaining long-run deviations from purchasing power parity.

This study investigated the relationship between globalization and public debt in Nigeria. With data from 1981 to 2022, Fully Modified OLS (FMOLS), Dynamic OLS (DOLS) and Canonical Cointegration Regression (CCR) estimation techniques were employed. Three different models were estimated. Across all three models, the results showed that there is a significant positive relationship between public debt and economic globalization in Nigeria. A one unit increase in globalization translates to a 26% jump in Nigeria’s public debt. The implication of this finding is that while Nigeria embraces global economic integration, a lot of caution must be observed because it comes at a huge cost to the nation. The cost to Nigeria is a high public debt burden. Already, the country is struggling to ensure that her public debts are sustainable and so we must not add too much pressure to our debt burden. This study recommends that the Nigerian government must undertake careful analysis of the various trade and financial globalization partnerships and agreements before signing any. It is important that we strike a balance between integrating into the global economy and maintaining sustainable public debt levels. The consequence of not doing this is that all gains made in the name of globalization could be eroded by high public debt repayment.

A high public debt and its consequences in the economy remain a very important issue to be discussed, especially during the periods of crisis and recessions. During the crisis, although Albania managed to maintain a positive economic growth, its public debt remains high and worrying for the economists. The purpose of this paper is to determine if there exist a correlation between the public debt and the economic growth in Albania, where the economic growth will be considered as the increase of GDP. Many authors have provided their contributions with various empirical analyzes to study the mutual link between economic growth and public debt and the results and the methodologies are different in different countries and periods. What is the situation in Albania at about the last 25 years? Analyzing the macroeconomic situation (the structure of Albanian public debt, the data on economic growth and public debt, the reasons of a high deb etc.) and the main causes of a positive growth and a macroeconomic stability, but a high public debt, we can conclude over the expectations and the trend of the future.

Background: In underdeveloped economies, the role of public debt is very vital with the intention of achieving a desirable level of output, employment and sustainability in long run economic growth. Fiscal deficit in developing economies is a common phenomenon because of low tax base and high imports. Economy of Pakistan is also facing fiscal deficit and trade deficit since its independence, so it relies on public debt to fill this fiscal gap.
 Objectives: The objective of this study is to estimate the optimal level of public debt for economic growth.
 Methods: This study explores the nonlinear relationships between public debt and economic growth of Pakistan by using time series data. The ARDL bound test technique is used to estimate the short-run and long-run impact of debt on economic growth. The growth maximizing level of debt is also estimated.
 Results: According to the estimated parameters, the optimal level of public debt is 60% of GDP. It also indicates that increase in government borrowings will raise economic growth in Pakistan in the long run. However, in the short run, if public debt increases it will boost economic growth after some levels of public debt and it will start declining.
 Conclusions: This study implies that public debt must be discouraged beyond optimal level of debt, as above optimal level it adversely affects the economic growth.
 Implications: The implication of the findings of the study is that higher interest rate curbs economic growth, therefore, present policy of keeping high interest rate by government should be revisited.
 Recommendations: Government of Pakistan should focus on fiscal and current account deficit, which are the main cause of increasing public debt, because higher public debt is not good for economic growth. Also, suitable fiscal policy is needed to control the debt burden and to get rid-off Ponzi game of debt from Pakistan by strictly enforcing the Fiscal Responsibility and Debt Limitation Act 2005.