Public Debt Overhang in the Heterogeneous Agent Model
Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)
In this paper, I demonstrate that expansionary fiscal policy associated with an increase in public debt can cause a persistent recession. I assume that entrepreneurs have borrowing constraints and that the government issues debt and collects tax from productive entrepreneurs. The government can also transfer resources to workers. Under this setting, an increase in public debt per se can enhance economic growth as it can compensate for the shortage of liquidity. However, output decreases as the transfer increases due to the income effect of the transfer on workers increasing the wage rate. Noticeably, both output and interest rates decline as the transfer and debt become larger. This result challenges the widely accepted view that the negative effect of expansionary fiscal policy on output should be the crowding-out effect that works through a hike in interest rates. It also implies that redistribution from workers to productive agents may enhance economic growth.
Pages: 21 pages
New Economics Papers: this item is included in nep-dge and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:14044
Access Statistics for this paper
More papers in Discussion papers from Research Institute of Economy, Trade and Industry (RIETI) Contact information at EDIRC.
Bibliographic data for series maintained by TANIMOTO, Toko ().