The Budget Deficit, Public Debt, and Endogenous Growth

Abstract

This paper analyzes the effects of public debt on endogenous growth in an overlapping generations model. The government fixes the budget deficit ratio. If the deficit ratio stays below a critical level, then there are two steady states where capital, output, and public debt grow at the same constant rate. An increase in the deficit ratio reduces the growth rate. If the deficit ratio exceeds the critical level, then there is no steady state. Capital growth declines continuously, and capital is driven down to zero in finite time. Copyright 2005 Blackwell Publishing Inc..

Wealth Effects and Public Debt in an Endogenous Growth Model

“…Moreover, reducing the public investment-to-GDP ratio, while keeping the debt finance ratio constant, raises the threshold of the public debt-to-public capital ratio: the range of sustainable initial public debt is therefore enlarged. In both Brauninger (2005) and Yakita (2008), increased public investment ratios not only require higher taxes but also increases in bond issuance, which drive interest rates upward. Crowding-out effects are thus prominent in their analyses and it is all the more so that public debt has no direct incidence on the long run steady state.…”

“…As a corollary, the level of public capital in the economy may be suboptimal if households pay insufficient attention to its productive features. Brauninger (2005) and Yakita (2008) extended the model to the case of unbalanced budget, encompassing therefore debt dynamics. Brauninger (2005) assumed an AK production function and concluded on the existence of a threshold public deficit ratio.…”

The Simple Dynamics of Public Debt With Productive Public Goods

“…In those models, as in Brauninger (2005), the government fixes its public deficit objective, either as the deficit itself in proportion to output or as the share of the budget deficit to be financed by debt (a criterion consistent with the Maastricht Treaty), and chooses the tax rate residually from the budget constraint.…”

“…3 The dynamics of public debt and economic growth have been studied in numerous contributions, including Chalk (2000), De la Croix and Michel (2002), Futagami and Shibata (2003), Brauninger (2005), Annichiarico and Giammarioli (2008), Fernández-Huertas and Vidal (2010), and Michel et al (2010). Chalk (2000) for instance analyzed the sustainability of bond-financed deficits in a two-period overlapping generations (OLG) model and established conditions under which a growth rate larger than the interest rate is a necessary, but not sufficient, condition to ensure the sustainability of a permanent budget deficit.…”

Public Debt, Child Allowances and Pension Benefits with Endogenous Fertility

“…Government expenditures in these models are regarded as public consumption. Similarly, Chalk (2000) and Bräuninger (2005) investigated whether public bond financing is sustainable or not in a model incorporating government consumption. Ono (2003) examined the dynamics of the public debt stock and capital stock and found that they depend on parametric conditions and the initial level of the public debt stock.…”