The Environmental Unsustainability of Public Debt: Non-Renewable Resources, Public Finances Stabilization and Growth

Nicolas Clootens and Francesco Magris

No 2021.06, Working Papers from FAERE - French Association of Environmental and Resource Economists

Abstract: This paper introduces a public debt stabilization constraint in an overlapping generation model in which non-renewable resources constitute a necessary input in the production function and belong to agents. It shows that stabilization of public debt at high level (as share of capital) may prevent the existence of a sustainable development path. Public debt thus appears as a threat to sustainable development. It also shows that higher public debt-to-capital ratios (and public expenditures-to-capital ones) are associated with lower growth. Two transmission channels are identified. As usual, public debt crowds out capital accumulation. In addition, public debt tends to increase resource use which reduces the rate of growth. We also analyze the dynamics and we show that the economy is characterized by saddle path stability. Finally, we show that the public debt-to-capital ratio may be calibrated to implement the social planner optimal allocation.

Keywords: Non-renewable Resources; Growth; Public Finances; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: H63 Q32 Q38 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2021-06
New Economics Papers: this item is included in nep-dge, nep-env and nep-fdg
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http://faere.fr/pub/WorkingPapers/Clootens_Magris_FAERE_WP2021.06.pdf First version, 2021 (application/pdf)

Related works:
Working Paper: The Environmental Unsustainability of Public Debt: Non-Renewable Resources, Public Finances Stabilization and Growth (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fae:wpaper:2021.06

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