Debt and Growth: Is There a Non-Monotonic Relation?
9 Pages Posted: 10 Dec 2012
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Public Debt and Public Investment in an Endogenous Growth Model with Real Wage Rigidities
By Alfred Greiner and Peter Flaschel
-
National Minimum Wages, Capital Mobility and Global Economic Growth
By Andreas Irmen and Berthold U. Wigger
-
Sustainable Public Debt and Economic Growth Under Wage Rigidity