Is Public Debt Growth-Enhancing or Growth-Reducing?
Real Arai (),
Takuma Kunieda () and
Keigo Nishida ()
No 884, KIER Working Papers from Kyoto University, Institute of Economic Research
To understand mixed evidence provided by empirical studies for the relationship between the accumulation of public debt and economic growth, it is necessary to consider not only the crowd-out effect of public debt on economic growth but also the growth-enhancing crowd-in effect that cannot be uncovered by the traditional theoretical achievements. We develop a dynamic general equilibrium model with infinitely lived agents and derive an inverted U-shaped relationship between the accumulation of public debt and economic growth. The analysis focuses on both crowd-out and crowd-in effects that public debt has on private investment in a financially constrained economy and clarifies the mechanism inducing the inverted U-shaped relationship in the growth process. When the public debt-to-GDP ratio is below a certain threshold level, the crowd-in effect dominates the crowd-out effect and the accumulation of public debt promotes economic growth. When the public debt-to-GDP ratio exceeds the threshold level, the accumulation of public debt begins to hinder economic growth with the crowd-out effect dominating the crowd-in effect.
Keywords: Economic growth; Public debt; Crowd-in effect; Financial market imperfections (search for similar items in EconPapers)
JEL-codes: O41 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro, nep-mac and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:884
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