Sustainable Public Debt and Economic Growth Under Wage Rigidity
23 Pages Posted: 25 Oct 2011 Last revised: 30 Dec 2012
Date Written: October 25, 2011
We analyze effects of public debt on economic growth in a basic endogenous growth model with persistent unemployment due to wages rigidities. We show that there exists either a unique balanced growth path or there are two balanced growth paths depending on structural parameters and on the flexibility of the labour market. Further, public debt does not affect long-run growth and employment but only stability of the economy. Stability is more likely when governments put a high weight on stabilizing the public debt to GDP ratio.
Keywords: Public debt, endogenous growth, unemployment, wage rigidities, dynamics
JEL Classification: H63, E24, O41
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