Public Debt in a Basic Endogenous Growth Model

7 Pages Posted: 14 Jan 2012

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: January 14, 2012

Abstract

In this note we work out the mechanism that makes public debt affect the allocation of resources in the long-run. To do so we analyze an AK growth model with elastic labour supply and a government sector. The government levies a distortionary income tax and issues bonds to finance both lump-sum transfers and non-distortionary public spending. We show that the long-run growth rate is the smaller the higher the debt ratio if the government adjusts public spending to meet its intertemporal budget constraint. If the government adjusts lump-sum transfers to fulfill its intertemporal budget constraint the public debt ratio does not affect the balanced growth rate.

Keywords: Government debt, intertemporal budget constraint, public spending, lump-sum transfers

JEL Classification: E62, H61, O41

Suggested Citation

Greiner, Alfred, Public Debt in a Basic Endogenous Growth Model (January 14, 2012). Available at SSRN: https://ssrn.com/abstract=1985153 or http://dx.doi.org/10.2139/ssrn.1985153

Alfred Greiner (Contact Author)

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

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