Application of government debt models for the situation of Latvia
2013
Semjonova, N., Riga Technical Univ. (Latvia)
The problem of successful government debt management that takes into account economic crises could not be solved without finding of an optimal strategy by means of mathematic simulation. The goal of the present paper is to analyse accumulation of Latvia government debt in the period 1995-2011 and to make prognosis of the debt accumulation in the framework of the borrowing policy that persisted in Latvia during the last decade. For the analysis, three models of government debt accumulation were considered: the two of Domar and the originally proposed crisis model that takes into account periodical changes in the growth rate of national income. The results showed that the crisis model provides the most adequate description of Latvia government debt growth during 1995 - 2011 and predicts a higher government debt to national income ratio and tax burden, required to pay interest on debt, than the alternative Domar's models. For Latvia, given the state borrowing policy will not change in comparison with 2008 - 2010, the tax burden might grow up to nearly 5% in 30 years, which might become intolerable for the economics.
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