Public debt and income inequality in an endogenous growth model with elastic labor supply

Abstract

In this study, we examine the relationships among long-run public debt policy, economic growth, and income inequality by extending a representative consumer theory of distribution and using an endogenous growth model with a sustainable fiscal rule, elastic labor supply, and initial endowment of heterogeneous wealth. We show that fiscal policy with strict (loose) budgetary discipline decreases (increases) the economic growth rate in the short run. In contrast, it increases (decreases) the economic growth rate in the long run. Then, we show that fiscal policy with strict (loose) budgetary discipline decreases (increases) income inequality in both the short and long run. First, we show that a balanced growth path is a locally stable saddle point. Then, we consider the relationships among public debt, the economic growth rate, and income inequality. In this model, the average leisure and the public-debt-to-private-capital ratio determine the rate of return and wage rate, affecting both the economic growth rate and income distribution across agents. We conclude that there is a negative relation between the economic growth rate and the measure of income inequality in the long run by conducting numerical simulations using US data. The policy implication of this paper is that the government has a public debt policy that achieves both faster economic growth and the improvement of income inequality. Supplementary Information The online version contains supplementary material available at 10.1007/s42495-023-00106-y.

Maximizing Economic Growth in Indonesia: A Model-Based Exploration of Optimal Tax Ratios

“…Evidence from this research strengthens the endogenous economic growth model pioneered by Romer (1990) and Barro (1990). Fiscal policy through taxation has a positive influence on economic growth in the long term (Arvin et al, 2021;Bhattacharyya & Gupta, 2021;Kavese & Phiri, 2020;Miyashita, 2023).…”

The relationship between tax revenue and economic growth in Indonesia through the endogenous growth model approach

“…Previous studies that put forward the same results, namely that the variable foreign direct investment has a causal relationship with economic growth is research conducted by Boly et al (2020), Burlea-Schiopoiu et al (2021), Phuong et al (2022), andTakumah &Iyke (2017). The government expenditure variable as one of the variables that cause economic growth is a study conducted by Arvin et al (2021), Christie (2014), Gurdal et al (2021), Kim & Park (2020) Miyashita (2023), Renström & Spataro (2021), Sabir (2019), and Takumah & Iyke (2017). Furthermore, the inflation variable is research conducted by Fu & Le Riche (2021), Mtui &Ndanshau (2020), andTakumah &Iyke (2017).…”

“…Strong evidence from this study states that the variable tax revenue is one factor that influences A or TFP. Several previous researchers who justified the variable tax revenue as an important factor affecting economic growth seen from endogenous growth models were Agell & Persson (2000), Arvin et al (2021), Bhattacharyya & Gupta (2021), Christie (2014), Curtis et al, (2022), Fosu & Magnus (2006), Fu & Le Riche (2021, Gao (2020), Ghazo et al (2021), Gurdal et al (2021), Irmen & Tabaković (2017), Jiang & Jiang (2014), Kim & Park (2020), Miyashita (2023), Mtui & Ndanshau (2020), Myles (2000), Padovano & Galli (2001), Sabir (2019), Takumah & Iyke (2017), Todtenhaupt & Voget (2021), and Turnovsky (1999.…”

“…Increasing TFP can encourage the transformation of economic growth to quality and efficiency types and achieve sustainable economic growth by relying on TFP (Bing et al, 2020). The assumption that A is expanding allows factors such as foreign direct investment, investment in research and development, government spending, and tax revenues to influence TFP (Bournakis & Mallick, 2018;Gurdal et al, 2021;Kim & Park, 2020;Miyashita, 2023;Renström & Spataro, 2021;Takumah & Iyke, 2017).…”

“…The extensive model defines factors other than production factors (capital and labor) as factors that influence output or economic growth, such as financial, political, policy, and institutional factors (Gao, 2020;Kim & Park, 2020;Liu & Liu, 2022;Wu et al, 2018). The use of the tax revenue variable as a factor influencing TFP has also been used by other researchers, such as Agell & Persson (2000), Arvin et al (2021); Bhattacharyya & Gupta (2021), Christie (2014), Curtis et al, (2022), Fu & Le Riche (2021, Gao (2020), Ho et al (2023) Irmen & Tabaković (2017), Jiang & Jiang (2014), Kim & Park (2020), Maganya (2020), Miyashita (2023), Mtui & Ndanshau (2020), Myles (2000), Padovano & Galli (2001), Sabir (2019), Todtenhaupt & Voget (2021), and Turnovsky (1999. With the current conditions, where capital moves quickly, job specialization, and technology move rapidly, the tax structure must be competitive to attract capital, job specialization, and technology which are important elements to maximize economic growth.…”