Public Debt and Public Investment in an Endogenous Growth Model with Real Wage Rigidities
27 Pages Posted: 29 Jan 2009
Date Written: January 29, 2009
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: Suggested Citation