Public Debt, Productive Public Spending and Endogenous Growth

25 Pages Posted: 21 Nov 2013 Last revised: 16 Jul 2014

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

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Date Written: November 21, 2013

Abstract

We analyze effects of public debt in a basic endogenous growth model with productive public spending. We demonstrate that a discretionary policy violates the inter-temporal government budget constraint along a balanced growth path. A balanced government budget gives a unique saddle point stable growth path. With a rule based policy, two saddle point stable balanced growth paths can occur, depending on the inter-temporal elasticity of substitution of consumption and on the primary surplus policy. Higher debt goes along with smaller long-run growth and we derive a condition such that a deficit financed increase in public spending raises the growth rate.

Keywords: Government debt, deficit rules, dynamics, endogenous growth

JEL Classification: H60, O23

Suggested Citation

Greiner, Alfred, Public Debt, Productive Public Spending and Endogenous Growth (November 21, 2013). Bielefeld Working Papers in Economics and Management No. 23-2013, Available at SSRN: https://ssrn.com/abstract=2357882 or http://dx.doi.org/10.2139/ssrn.2357882

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

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