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

Abstract: 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: E62 O41 (search for similar items in EconPapers)
Pages: 31pages
Date: 2014-01
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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