Public Debt and the Dynamics of Economic Growth

Abstract

We analyze effects of public debt on economic growth and its dynamics in a basic endogenous growth assuming that the history of debt affects the primary surplus of the government. The economy with a balanced government budget is characterized by a unique balanced growth path and a condition for saddle point stability is derived. With permanent public deficits there is either no balanced growth path, a unique balanced growth path or there exist two balanced growth paths. The balanced growth path is either stable or unstable. Further, the system may undergo a Hopf bifurcation leading to stable limit cycles.

Keywords: Inter-temporal budget constraint, balanced budget, endogenous growth, dynamics, Hopf bifurcation

JEL Classification: H60, O23