Government expenditure, external and domestic public debt, and economic growth

Cuong Le Van (), Phu Nguyen-Van, Amélie Barbier-Gauchard () and Duc-Anh Le
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Cuong Le Van: IPAG Business School, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Amélie Barbier-Gauchard: UNISTRA - Université de Strasbourg, BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique
Duc-Anh Le: UNISTRA - Université de Strasbourg, BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper analyzes the relationship between government expenditure, tax on returns to assets, public debt, and growth in an endogenous growth model. Public debt is composed of two components, domestic debt and external debt. We show conditions for existence, uniqueness, and multiplicity of the steady states. More precisely, existence of steady state requires a sufficiently high productivity and a sufficiently low tax on returns to assets. We also provide the effects of an increase in the tax rate on returns to assets on the steady state. In particular, the relation between public spending and the tax rate has a bell shape. Domestic debt unambiguously increases with tax whereas external debt displays an inverted U-shaped curve. A high tax rate leads to a reallocation of public debt in favor of domestic debt (to the detriment of external debt). The effect of taxation on consumption (and production) also displays a nonlinear pattern when the output elasticity of capital is lower than unity (the effect is monotonously increasing if this elasticity is unity). We also derive the conditions under which a tax increase can boost or reduce the balanced growth rate.

Keywords: Public expenditure; Public debt; Economic growth; Tax on returns to assets; Domestic debt; External debt; Growth; Dépense publique; Dette publique; Croissance économique (search for similar items in EconPapers)
Date: 2019
Note: View the original document on HAL open archive server: https://hal.science/hal-02093378v1
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Citations: View citations in EconPapers (3)

Published in Journal of Public Economic Theory, 2019, 21 (1), pp.116-134. ⟨10.1111/jpet.12324⟩

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Related works:
Journal Article: Government expenditure, external and domestic public debt, and economic growth (2019)
Working Paper: Government expenditure, external and domestic public debt, and economic growth (2019)
Working Paper: Government expenditure, external and domestic public debt, and economic growth (2019)
Working Paper: Government expenditure, external and domestic public debts, and economic growth (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02093378

DOI: 10.1111/jpet.12324

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