Economic Growth, Public Debt and Welfare: Comparing Three Budgetary Rules

Abstract

We present an endogenous growth model with externalities of capital and elastic labour supply where we allow for public debt and public spending that is welfare enhancing. We analyze effects of different debt policies on stability and how these policies affect long-run growth and welfare. The following budgetary rules are considered: The balanced budget rule, a budgetary rule where debt grows in the long-run but at a rate lower than the balanced growth rate and a rule where public debt grows at the same rate as all other economic variables but that guarantees that the inter-temporal budget constraint is fulfilled.

Keywords: Inter-temporal Budget Constraint, Balanced Budget, Endogenous Growth, Welfare, Stability

JEL Classification: E62, H61, O41