Global directed technical change model with fiscal and monetary policies, and public debt

Daniel Loureiro, Oscar Afonso () and Paulo B. Vasconcelos
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Oscar Afonso: University of Porto, CEFUP
Paulo B. Vasconcelos: University of Porto, CMUP and CEFUP

Economic Change and Restructuring, 2024, vol. 57, issue 2, No 68, 57 pages

Abstract: Abstract We develop an endogenous growth model with North–South interactions, monetary policy, and a multi-dimensional role for fiscal policy. To boost economic performance, the government of the less developed country subsidizes R&D and intermediate goods production. Besides, to account for the effects of excessive public debt, we introduce a negative externality on productivity and a risk premium effect. Our findings reveal that the steady-state growth rate of both economies depends positively on the subsidies in the South and negatively on the public debt’s externality on productivity and the risk premium affecting the indebted economy. Additionally, public debt externalities increase the equilibrium wage inequality, making it more significant in the South. To minimize these effects, both countries can agree to mutualize their debts to overcome the risk premium. Then, the economy’s steady-state growth rate would increase in both countries. Finally, several policy implications were retrieved.

Keywords: R&D endogenous growth; Fiscal policy; Subsidies; Public debt; Monetary union (search for similar items in EconPapers)
JEL-codes: E41 E62 F16 F43 F45 O31 O33 O40 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10644-024-09672-3

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