DEBT POLICY RULE, UTILITY-GENERATING GOVERNMENT SPENDING, AND INDETERMINACY OF THE TRANSITION PATH IN AN AK MODEL

Takeo Hori and Noritaka Maebayashi

Macroeconomic Dynamics, 2019, vol. 23, issue 6, 2360-2377

Abstract: This study examines the effects of borrowing for public services that increase households' utility (i.e., utility-generating government services) in an AK endogenous growth model. We assume that the government has a target debt ratio. The European Union and the United Kingdom adopt such debt policy rules. We find that application of a debt policy rule into utility-generating government spending causes indeterminacy of the transition path. We point out that the level of the target debt ratio, the tax rate, and the household utility parameters are important determinants of indeterminacy when considering utility-generating government services.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:23:y:2019:i:06:p:2360-2377_00

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