On (Non-)Neutrality of Public Debt in Growing Economies

23 Pages Posted: 14 Nov 2011 Last revised: 30 Dec 2012

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: November 14, 2011

Abstract

In this paper we analyze effects of public debt on the long-run allocation of resources in a basic endogenous growth model with infinitely lived households. The government levies an income tax and issues government bonds to finance unproductive public spending. We demonstrate that in the case of flexible wages and elastic labour supply the balanced growth rate is the higher the smaller the ratio of public debt to GDP for a given income tax rate. When wages are rigid public debt is neutral in the sense that it does not affect the allocation of resources along the balanced growth path.

Keywords: Public debt, inter-temporal budget constraint, wage flexibility

JEL Classification: E62, H61, O41

Suggested Citation

Greiner, Alfred, On (Non-)Neutrality of Public Debt in Growing Economies (November 14, 2011). Available at SSRN: https://ssrn.com/abstract=1959329 or http://dx.doi.org/10.2139/ssrn.1959329

Alfred Greiner (Contact Author)

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

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