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The effect of public debt on growth and welfare under the golden rule of public finance

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  • Ueshina, Mitsuru

Abstract

This study analyzes an endogenous growth model with public capital and public debt under the “golden rule of public finance” which prohibits the government from issuing bonds for nonproductive purposes. We assume that public investment is fully financed by fiscal deficit in our model analyzing the effects of public debt on the economy. Our results under the fiscal rule can be summarized as follows. First, the model shows two steady states exist: one is unstable with zero growth and the other is saddle-path stable with positive growth. The economy may not converge to the stable steady state if the public capital relative to public debt is not sufficient at the initial point. Second, the model shows that the growth maximizing tax rate exceeds the welfare-maximizing tax rate in considering transitional dynamics, but the short-term effect can differ from that of a model with a balanced budget rule.

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  • Ueshina, Mitsuru, 2018. "The effect of public debt on growth and welfare under the golden rule of public finance," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 1-11.
    • Handle: RePEc:eee:jmacro:v:55:y:2018:i:c:p:1-11
    DOI: 10.1016/j.jmacro.2017.08.004
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    Cited by:

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    2. Uchida, Yuki & Ono, Tetsuo, 2021. "Borrowing to finance public investment: a politico-economic analysis of fiscal rules," MPRA Paper 115844, University Library of Munich, Germany, revised 31 Dec 2022.
    3. Tetsuo Ono, 2020. "Fiscal rules in a monetary economy: Implications for growth and welfare," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(1), pages 190-219, February.
    4. Aso Hiroki & Ueshina Mitsuru, 2023. "Fertility, fiscal deficit and sustainability of public debt in an endogenous growth model," Economics and Business Review, Sciendo, vol. 9(3), pages 224-238, October.
    5. Kamiguchi, Akira & Tamai, Toshiki, 2023. "Public investment, national debt, and economic growth: The role of debt finance under dynamic inefficiency," Journal of Macroeconomics, Elsevier, vol. 77(C).
    6. Shobande Olatunji Abdul, 2020. "Fiscal Rule in Africa," Open Economics, De Gruyter, vol. 3(1), pages 112-120, January.
    7. Kamiguchi, Akira & Tamai, Toshiki, 2019. "Public investment, public debt, and population aging under the golden rule of public finance," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 110-122.
    8. Minoru Watanabe, 2021. "Tax reform, unemployment, and fertility," Discussion Papers 2128, Graduate School of Economics, Kobe University.
    9. Atemnkeng, Johannes Tabi & Tingum, Ernest Ngeh & Senke, Ngeh Laura, 2024. "Deficit Financing and Economic Return to Public Expenditure in the CEMAC Member Countries," African Journal of Economic Review, African Journal of Economic Review, vol. 12(1), March.

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    More about this item

    Keywords

    Endogenous growth; Golden rule of public finance; Public investment; Welfare;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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