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Ponzi game in OLG model with endogenous growth and productive government spending

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  • Philippe Darreau

    ()
    (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)

  • François Pigalle

    ()
    (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société)

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    Abstract

    Barro's model is an AK model, and there cannot be dynamic inefficiency since the social yield of the capital is higher than the growth rate. But it may be that the private yield and thus the interest rate are lower than the growth rate. One can thus have a Ponzi game and the government can allow a permanent roll-over of debt and cut taxes. However we show that in this model since the capital is under-accumulated, playing a Ponzi game produces a crowding-out of capital and reduces the growth rate and welfare. The practical message of this article is that even when the interest rate is lower than the growth rate, the public debt is not a Pareto improvement when it generates a crowding-out of capital and reduces endogenous growth.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number hal-00785437.

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    Date of creation: 2011
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    Publication status: Published, Economics Bulletin, 2011, 31, 3, 2509-2520
    Handle: RePEc:hal:journl:hal-00785437

    Note: View the original document on HAL open archive server: http://hal-unilim.archives-ouvertes.fr/hal-00785437
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    Related research

    Keywords: Public debt; public spending; endogenous growth; Ponzi game;

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    1. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    3. Ghosh, Sugata & Mourmouras, Iannis A., 2004. "Endogenous growth, welfare and budgetary regimes," Journal of Macroeconomics, Elsevier, Elsevier, vol. 26(4), pages 623-635, December.
    4. Alexandru Minea & Patrick Villieu, 2009. "Borrowing to Finance Public Investment? The 'Golden Rule of Public Finance' Reconsidered in an Endogenous Growth Setting," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 103-133, 03.
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