Foreign vs. domestic public debt and the composition of government expenditure
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Zusammenfassung
In this work I detect an economic link between the public choices of where to issue debt (domestically vs. abroad) and how to spend these funds (investment vs. consumption). I use an OLG framework to identify three key parameters that determine these decisions: the productivity of public investment, the economic costs in case of default, and the political weight of the two generations alive. Strong empirical support can especially be found for the marginal effects of the latter. These effects are even prevailing, if I account for endogenous default costs in the model.