The Burden of Government Debt in an Almost Small Open Economy

This paper reviews and extends some recent work that I have done on the burden of government debt in an “almost small” open economy. An almost small open economy has unrestricted access to the international capital market at a given world real interest rate (plus perhaps an exogenous country risk premium) and faces given world prices for its imports, but it has market power in its export sector because its exports are perceived to be imperfect substitutes for the tradeables of other countries. The export industry is also assumed to be (approximately) perfectly competitive so whatever market power the country as a whole possesses will not be exercised by individual firms choosing the appropriate price markups; it will require some from of government intervention such as export taxes or quotas.