Dynamic analysis of reductions in public debt in an endogenous growth model with public capital

Noritaka Maebayashi (), Takeo Hori () and Koichi Futagami
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Noritaka Maebayashi: Graduate School of Economics, Osaka University
Takeo Hori: College of Economics, Aoyama Gakuin University

No 12-08, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: We construct an endogenous growth model with productive public capital and government debt when government debt is adjusted to the target level. We examine how reducing public debt in an economy with a large public debt affects the transition of the economy and welfare. We find that the government faces the following trade off when reducing its debt. In the short run, public investment is reduced to decrease the debt and this has a negative effect on welfare. However, as the interest payments on the debt decrease, public investment begins to increase. Eventually, the government can increase the amount of public investment by more than before. This has a positive effect on welfare, implying that reducing the debt is welfare improving. Furthermore, we find that the adjustment speed of reductions in debt affects welfare crucially. The relationships between the welfare gains and the adjustment speed are U-shaped in many cases. However, they are decreasing monotonically when the tax rate is low and the initial debt?GDP ratio is sufficiently large.

Keywords: Reductions in public debt; Debt policy rule; Public capital; Endogenous Growth (search for similar items in EconPapers)
JEL-codes: E62 H54 H63 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-04
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac and nep-pbe
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: DYNAMIC ANALYSIS OF REDUCTIONS IN PUBLIC DEBT IN AN ENDOGENOUS GROWTH MODEL WITH PUBLIC CAPITAL (2017)
Working Paper: Dynamic analysis of reductions in public debt in an endogenous growth model with public capital (2015)
Working Paper: Dynamic analysis of reductions in public debt in an endogenous growth model with public capital (2014)
Working Paper: Dynamic analysis of reductions in public debt in an endogenous growth model with public capital (2013)
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