Public Debt and Public Investment in an Endogenous Growth Model with Real Wage Rigidities

27 Pages Posted: 29 Jan 2009

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics

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Date Written: January 29, 2009

Abstract

In this paper we present an endogenous growth model with public capital, public debt and where real wages are either flexible or rigid due to labor market imperfections. With flexible wages, a balanced budget scenario yields the highest balanced growth rate. Further, simulations suggest that there is a trade-off between positive growth effects of deficit financed public investment and stability of the model. With real wage rigidities, a balanced budget scenario may yield a lower balanced growth rate compared to permanent public deficits. Further, the trade-off between growth effects of deficit financed investment and stability does not exist.

Keywords: Public debt, public capital, wage rigidities, unemployment, economic growth

JEL Classification: E62, H60, H54

Suggested Citation

Greiner, Alfred and Flaschel, Peter, Public Debt and Public Investment in an Endogenous Growth Model with Real Wage Rigidities (January 29, 2009). Available at SSRN: https://ssrn.com/abstract=1334542 or http://dx.doi.org/10.2139/ssrn.1334542

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, 33501
Germany
+49 521 106 4859 (Phone)
+49 521 106 67120 (Fax)

HOME PAGE: http://phoenix.wiwi.uni-bielefeld.de/lehrbereiche/vwl/wipol

Peter Flaschel

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

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