Does public indebtedness constrain or can it favor economic growth? A simple analytical modeling

Séverine Menguy

Bulletin of Applied Economics, 2019, vol. 6, issue 2, 1-29

Abstract: This paper aims at shedding an analytical light on the consequences of the public indebtedness level on economic growth. We show that increasing the current public debt can sustain short run economic activity, and mainly net exports and public investment expenditure. On the labor market, in the short run, the public debt can also increase the capital stock, the real wage, and more moderately labor demand and supply. However, our modelling also underlines that there are many obstacles to the positive effect of a higher public debt level on long term economic growth. Indeed, if the elasticity of the nominal interest rate to the increase of the public debt becomes high (worry of the financial markets), increasing the public indebtedness level can damage current economic activity. Besides, a previous increasing trend of the public debt can be damaging, and the trajectory of the public debt should also be taken into account.

Keywords: public debt; economic activity; public investment and consumption expenditure; private investment; private consumption; labor demand and supply. (search for similar items in EconPapers)
JEL-codes: E62 F43 H63 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:rmk:rmkbae:v:6:y:2019:i:2:p:1-29

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