A Closed-Form Solution for Determining the Burden of Public Debt in Neoclassical Growth Models

Dedák, István; Dombi, Ákos

doi:10.2139/ssrn.2746805

Cited by 2 publications

(3 citation statements)

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“…where s K and s H are the saving (investment) rates in relation to physical and human capital, respectively. To calculate the burden of public debt, we have to rearrange equation 28in such a way that it already does contain the debt-to-GDP ratio (Dedák and Dombi 2018). In this derivation, the first step is to calculate the effect of the budget balance on the aggregate saving rate.…”

Section: Government Debt In the Solow Model With Human Capitalmentioning

confidence: 99%

“…The magnitude of output loss decreases with the private sector's saving rate and increases with the population growth rate. The intuitive explanation is the following (Dedák and Dombi 2018). If the saving rate of the private sector is high, then the budget deficit necessary to maintain a given debt-to-GDP ratio decreases the aggregate saving rate only modestly in percentage terms and hence leads to small changes in steady-state output.…”

Section: Government Debt In the Solow Model With Human Capitalmentioning

confidence: 99%

“…The specific framework used in the previous section can easily be extended to a general one embracing all kinds of neoclassical growth models in terms of households' saving behaviour. The key insight is to incorporate a reaction function into the original Solow framework that reflects the responsiveness of households' saving to the budget deficit through a moveable parameter (Dedák and Dombi 2018). Let's denote this responsiveness parameter by q with the following content: q ¼ À@I=@D, where I is investments and D is the budget deficit in absolute term.…”

Section: A General Framework For the Burden Of Public Debt In Neocmentioning

confidence: 99%

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Public debt and economic growth: what do neoclassical growth models teach us?

Dombi

Dedák

2018

Applied Economics

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This paper aims to quantify the crowding-out effect of public debt and the related loss in longrun output in neoclassical growth models. To accomplish this task, we incorporate the government sector into the Ramsey-Cass-Koopmans (RCK) model, the Blanchard model and the Solow model, which differ only in their assumptions concerning the consumption behaviour of households. We also introduce a general framework that is capable of gauging the burden of public debt in a neoclassical world in the case of any type of consumption behaviour. Our results are threefold. First, contrary to the RCK model, public debt reduces long-run output in the Blanchard model and the Solow model, although to a different extent: the crowding-out effect is marginal in the former, whereas it can be very large in the latter. Second, the burden of public debt is country-specific depending crucially on the saving rate and the population growth rate. Finally, in developed countries the upper limit of the output loss related to public debt is moderate at best even if distortionary taxes are taken into account.

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Section: Government Debt In the Solow Model With Human Capitalmentioning

confidence: 99%

Section: Government Debt In the Solow Model With Human Capitalmentioning

confidence: 99%

Section: A General Framework For the Burden Of Public Debt In Neocmentioning

confidence: 99%

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