Debt and Growth: Is There a Non-Monotonic Relation?

9 Pages Posted: 10 Dec 2012

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: December 10, 2012

Abstract

In this note we theoretically investigate the question of whether the relationship between public debt and economic growth is characterized by an inverse U-shaped functional form. Starting point of our analysis is the paper by Checherita-Westphal et al. (2012) who present an endogenous growth model with public capital and public debt that displays a hump-shaped relation between debt and economic growth. We highlight the mechanism that generates this outcome and we generalize their model by allowing for a more general debt policy. We demonstrate that this nonmonotonic relation only holds if public deficits are exogenously fixed and exactly equal to public investment at each point in time. With a more general debt policy, one realizes that smaller public deficits and lower public debt always lead to a higher balanced growth rate. Thus, starting from a situation where the public deficit equals public investment, governments can raise the long-run growth rate by reducing their deficits.

Keywords: Government debt, economic growth, non-monotonic relation

JEL Classification: H60, O23

Suggested Citation

Greiner, Alfred, Debt and Growth: Is There a Non-Monotonic Relation? (December 10, 2012). Bielefeld Working Papers in Economics and Management No. 04-2012, Available at SSRN: https://ssrn.com/abstract=2187298 or http://dx.doi.org/10.2139/ssrn.2187298

Alfred Greiner (Contact Author)

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

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Germany
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