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

AuthorIrina Bilan
European Integration - Realities and Perspectives. Proceedings 2016
Overview of the Main Theories on the Economic Effects of Public
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.

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