A new look at fiscal sustainability: an attempt to reveal the relationship between the sustainability of foreign debt and the inequality

Researches on sustainability of public debt have been conducted extensively focusing on various criteria such as debt/GDP ratio, debt/ export ratio, no-bubble condition, banks' home bias etc. The present paper attempts to look at the problem from a different angle. That is, following the recent literatures that pay attention to the inequality and assuming increase in share of capital income to mean increase in the inequality in a broad sense, we examine the condition for stabilizing the foreign debt. It is revealed that foreign debt converges to some value if the interest rate on the foreign debt is less than the growth rate. It is also shown that the foreign debt is sustainable if ( 1) share of capital income is small, ( 2) initial ratio of the foreign debt to GDP is small, ( 3) saving rate is high or ( 4) interest rate on the foreign debt is low.