Sustainable Public Debt and Economic Growth Under Wage Rigidity

Abstract

We analyse the 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 debt to GDP ratio.