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Political Economy of Debt and Growth

Marco Battaglini () and Levon Barseghyan ()

No 21660, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a theory of endogenous fiscal policy and growth. Fiscal policy — debt, income tax, spending on local public goods and public investment — is determined through legislative bargaining. Economic growth depends directly on public investment, private investment in human capital and, via learning-by-doing, labor supply. The model predicts that the economy converges to a balanced growth path in which consumption, private investment, public investment, public goods provision, public debt and productivity grow at the same constant rate. The transition to the balanced growth path is characterized by what we call the shrinking government effect: public debt grows faster than GDP, provisions of public goods and infrastructure grow slower than GDP and the tax rate declines. We use the model to study the impact of austerity programs which impose a ceiling on the amount of public debt a country can issue.

JEL-codes: D72 E6 E62 H6 H72 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-gro, nep-mac, nep-pbe and nep-pol
Date: 2015-10
Note: PE POL
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Published as Barseghyan, Levon & Battaglini, Marco, 2016. "Political economy of debt and growth," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 36-51.

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