The Marginal Cost of Funds from Public Sector Borrowing

Bev Dahlby ()

The B.E. Journal of Economic Analysis & Policy, 2006, vol. 6, issue 1, 30

Abstract: An expression for the welfare cost of a marginal increase in the public debt is derived using a simple AK endogenous growth model. This measure of the marginal cost of public funds (MCF) can be interpreted as the marginal benefit-cost ratio that a debt-financed public project needs in order to generate a net social gain. The model predicts an increase in the public debt ratio will have little effect on the optimal public expenditure ratio and that most of the adjustment will occur on the tax side of the budget.

Keywords: public debt; crowding out; marginal cost of public funds; endogenous growth (search for similar items in EconPapers)
Date: 2006
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DOI: 10.2202/1538-0653.1393

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