Sovereign debt and fiscal consolidation in the united states of america and greece: a comparative ecnometric approach

Abstract

One of the most challenging macroeconomic policies is sovereign debt reduction. The purpose of this study is to estimate the determinant of government debt in the USA and approximate comparative debt reduction models for the USA and Greece. It also evaluates methods of reducing government debt, decreasing government spending and increasing taxes and finally, consequences of fiscal consolidation in the USA and Greece. The frequently used debt reduction measures are: inflation, fiscal consolidation, economic growth, financial repression, debt restructuring and debt default. The Vector Error Correction Model, Granger causality, variance decomposition and the Generalised Impulse Response Function techniques were employed to analyse the data. The results of the determinants of real federal debt for the USA revealed that there is a negative and significant relationship between consumer price index and real federal tax receipts with real federal debt in the USA. There is a positive and significant relationship between real federal interest payment and real government spending with real federal debt. The comparative analysis revealed a significant and negative relationship between general government debt and inflation in the USA while in Greece, the relationship is negative and insignificantly negative. A positive and insignificant relationship is observed between gross domestic product growth in the USA and negative and insignificant relationship in Greece. There is a negative and significant relationship between general government debt and primary balance in the USA while a positive and significant relationship exists in Greece. A negative and insignificant relationship exists between general government debt and net transfer from abroad in the USA while a negative and significant relationship exists in Greece. From the findings, in order for the US government to reduce its debts, there is a need to increase consumer price index to a sustained level and federal government current tax receipts. There is also a need to cut down federal interest payment and government spending on goods and services. This comparative study revealed that sovereign debt could be reduced in the USA by increasing inflation (sustained level) and primary balance while in Greece, government debt could be reduced by decreasing primary balance and increasing net current transfers from abroad.