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

17 Pages Posted: 22 Dec 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: 2009-02-14

Abstract

We present an endogenous growth model with public capital, public debt and real wage rigidities due to labor market imperfections. Assuming that the primary surplus relative to gross domestic produce (GDP) is a positive function of the debt to GDP ratio, we study growth and employment effects of deficit-financed public investment using simulations as well as how fiscal policy affects stability of the economy. Further, we contrast the growth rate and the unemployment rate in the deficit scenario with that of the balanced budget scenario. Finally, we compare our results with those obtained in case of flexible wages and full employment.

Suggested Citation

Greiner, Alfred and Flaschel, Peter, Public Debt and Public Investment in an Endogenous Growth Model with Real Wage Rigidities (2009-02-14). Scottish Journal of Political Economy, Vol. 57, Issue 1, pp. 68-84, February 2010, Available at SSRN: https://ssrn.com/abstract=1526835 or http://dx.doi.org/10.1111/j.1467-9485.2009.00507.x

Alfred Greiner (Contact Author)

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

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Germany
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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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