Overview of the Main Theories on the Economic Effects of Public Indebtedness

• Author: Irina Bilan
• Pages: 356-362

European Integration - Realities and Perspectives. Proceedings 2016

356

Overview of the Main Theories on the Economic Effects of Public

Indebtedness

Irina Bilan1

Abstract: The paper briefly reviews the main theories formulated over time on the economic effects of public

indebtedness, with the aim to highlight their common and divergent points, the arguments they rely upon, as

well as their relevance, given the cu rrent economic environment. Three major views are considered, namely

the classical one, the Keynesian one and the view of neoliberal economists (monetarist economists and

representatives of the school of rational expectations). The comparative appro ach of the different views

allowed us to shape some criteria of decision which may prove useful for public p olicymakers in formulating

public debt policies conducive to economic growth: public ind ebtedness should not become common practice

but be reserved for those situations in which the economy is confronted with unusual phenomena, such as

economic downturns; borrowed resources should be used especially on those destinations which create added

value in the economy, such as public investment; public debt should not accumulate at a fast pace and should

be kept within reasonable limits, to avoid possible side effects on economic growth.

Keywords: government debt; economic growth; classical theory; Keynesian theory; neoclassical view

JEL Classification: B10; B20; H63

1. Introduction

If an omniscient and objective witness of history was called upon to give a verdict on the rationality of

states indebtedness, one thing would be certain: his task would be extremely difficult and his answer

far from being categorical. The realities of different countries and different periods have shown that

the indebtedness of public authorities can entail both positive and negative effects on various aspects

of social and economic life (including on the economic growth rate of the country in question), the

extent to which they occur and their proportions depending on numerous factors, some under the direct

control of the indebted authorities (possibly the result even of their decisions), while others with a

broader spectrum of action, the manifestation of which may sometimes be hardly anticipated.

Unfortunately, in the realm of economic theory things are not much clearer. The views of various

economists, outlined in relation to the specifics of their times, oscillate between recognizing, in

varying proportions, the need for public borrowing and the possibility of incurring beneficial effects

on its account (for example when it is supported, in this way, the economy in recession), and blaming

the state's right to use public loans, as responsible for many “bad things” in the economy and society

(Bilan, 2015).

1 Senior Lecturer, PhD, Faculty of Economics and Business Administration, "Alexandru Ioan Cuza" University of Iași,

Address: 11 Carol I Blvd, Iasi, Romania, Tel.: 0232/201440, Corresponding author: irina.bilan@uaic.ro.