Simple Dynamics of Public Debt with Productive Public Goods

Pierre-Richard Agénor and Sakir Yilmaz

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper analyzes the dynamics of public debt in a simple two-period overlapping generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge under that rule are characterized. The analysis is then extended to consider the case of an endogenous risk premium, a generalized golden rule, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving the allocation of resources to specific types of public investment, even in a context of fiscal retrenchment.

Pages: 43 pages
Date: 2012
New Economics Papers: this item is included in nep-dem, nep-dge and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:165

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