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Does public indebtedness constrain or can it favor economic growth? A simple analytical modeling

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  • Séverine MENGUY

Abstract

This paper aims at shedding an analytical light on the consequences of the public indebtedness level on economic growth. We show that increasing the current public debt can sustain short run economic activity, and mainly net exports and public investment expenditure. On the labor market, in the short run, the public debt can also increase the capital stock, the real wage, and more moderately labor demand and supply. However, our modelling also underlines that there are many obstacles to the positive effect of a higher public debt level on long term economic growth. Indeed, if the elasticity of the nominal interest rate to the increase of the public debt becomes high (worry of the financial markets), increasing the public indebtedness level can damage current economic activity. Besides, a previous increasing trend of the public debt can be damaging, and the trajectory of the public debt should also be taken into account.

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  • Séverine MENGUY, 2019. "Does public indebtedness constrain or can it favor economic growth? A simple analytical modeling," Bulletin of Applied Economics, Risk Market Journals, vol. 6(2), pages 1-29.
    • Handle: RePEc:rmk:rmkbae:v:6:y:2019:i:2:p:1-29
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    More about this item

    Keywords

    public debt; economic activity; public investment and consumption expenditure; private investment; private consumption; labor demand and supply.;
    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
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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