Economic Growth and Public Debt in the World Economy

Karl Farmer and Matthias Schelnast ()
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Matthias Schelnast: University of Graz

Chapter 4 in Growth and International Trade, 2013, pp 81-109 from Springer

Abstract: Abstract This chapter is devoted to the exploration of the relationship between public debt and economic growth in an extended version of the basic OLG growth model described in Chaps. 2 and 3. First, the two-dimensional intertemporal equilibrium dynamics of the debt-to-capital ratio and the efficiency-weighted capital intensity are derived from agents’ FOCs and market-clearing conditions under the assumption of a constant-flow budget policy. Here, in contrast to the basic OLG growth model without public debt, we find multiple steady-state solutions exhibiting both saddle-path and asymptotic stability. Under asymptotic stability there is no unique relationship between public debt and capital accumulation. Starting from a high-debt, low-capital-intensity and dynamically efficient steady state with a primary budget surplus, the debt-to-GDP ratio can be reduced only by both raising the tax rate and the public expenditure ratio, and it is accompanied by a fall in private capital intensity.

Keywords: Real Interest Rate; Public Debt; Government Bond; Private Capital; Government Debt (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/978-3-642-33669-0_4

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