Human capital formation and public debt: growth and welfare effects of three different deficit policies

Alfred Greiner

Journal of Economic Policy Reform, 2016, vol. 19, issue 4, 369-385

Abstract: We analyze an endogenous growth model public educational spending. We show that the balanced budget policy and the policy with a slight deficit yield higher growth than a debt policy where public debt grows at the same rate as GDP, unless the government is a creditor. As concerns welfare, it can be demonstrated that a strong deficit policy yields lower welfare than a balanced budget and a slight deficit policy, unless initial debt ratios are low and the intertemporal elasticity of substitution is high. Finally, there may exist an inverted U-shaped relation between welfare and deficit-financed educational spending.

Date: 2016
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DOI: 10.1080/17487870.2015.1128834

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