Public Debt and Aggregate Stability with Endogenous Growth and a State-Dependent Consumption Tax

23 Pages Posted: 6 Feb 2014

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Anton A. Bondarev

WWZ Universit├Ąt Basel

Date Written: February 2014

Abstract

We analyze how different budgetary rules affect the stability of an economy in a basic endogenous growth model with public debt and a state-dependent consumption tax rate. We show that a discretionary policy implies that the government violates its inter-temporal budget constraint along a balanced growth path, whereas a balanced budget rule guarantees that the economy is stable. A rule based debt policy gives rise to stability if the reaction of the primary surplus to higher public debt is sufficiently large. Further, in case of a strongly regressive consumption tax rate over a certain range, multiple balanced growth paths may emerge. The main results can be generalized to hold for any endogenous growth model with infinitely lived households.

Keywords: Budget rules, public debt, inter-temporal budget constraint, stability, endogenous growth

JEL Classification: C62, H63, O41

Suggested Citation

Greiner, Alfred and Bondarev, Anton A., Public Debt and Aggregate Stability with Endogenous Growth and a State-Dependent Consumption Tax (February 2014). Bielefeld Working Papers in Economics and Management No. 02-2014, Available at SSRN: https://ssrn.com/abstract=2391134 or http://dx.doi.org/10.2139/ssrn.2391134

Alfred Greiner (Contact Author)

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

P.O. Box 100131
Bielefeld, 33501
Germany
+49 521 106 4859 (Phone)
+49 521 106 67120 (Fax)

HOME PAGE: http://phoenix.wiwi.uni-bielefeld.de/lehrbereiche/vwl/wipol

Anton A. Bondarev

WWZ Universit├Ąt Basel ( email )

Basel, 4051
Switzerland

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