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Budget Deficits and Economic Growth

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  • Futagami, Koichi
  • Shibata, Akihisa

Abstract

This paper investigates the sustainability and welfare effects of government budget deficits by using a simple endogenous growth model with overlapping generations. It is shown that, if the initial volume of government debt and the ratio of primary budget deficits to GDP are not large, then there can exist two steady-growth equilibria, one of which is associated with a higher growth rate and the other of which is associated with a lower growth rate. It is also shown that changes in government spending cannot be Pareto improving although they affect the long-run growth rate and each generation's utility.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/14457/1/pie_dp133.pdf
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Bibliographic Info

Paper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series Discussion Paper with number 133.

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Length: 26, [8] p.
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:hit:piedp1:133

Note: January 8, 2003
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Keywords: endogenous growth; sustainability of government budget deficits; welfare effects;

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References

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  1. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
  2. Giovanni Ganelli, 2002. "Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour Supply," Trinity Economics Papers 200215, Trinity College Dublin, Department of Economics.
  3. Rankin, N. & Roffia, B., 1999. "Maximum Sustainable Government Debt in the Overlapping Generations Model," The Warwick Economics Research Paper Series (TWERPS) 521, University of Warwick, Department of Economics.
  4. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521806428, October.
  5. Alogoskoufis, George S. & van der Ploeg, Frederick, 1991. "On budgetary policies, growth, and external deficits in an interdependent world," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 305-324, December.
  6. Kazuo Mino & Akihisa Shibata, 2000. "Growth and Welfare Effects of Monetary Expansion in an Overlapping-generations Economy," The Japanese Economic Review, Japanese Economic Association, vol. 51(3), pages 407-430, 09.
  7. Bhattacharya, Joydeep & Kudoh, N, 2002. "Tight Money Policies and Inflation Revisited," Staff General Research Papers 5085, Iowa State University, Department of Economics.
  8. Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory 88-03, Federal Reserve Bank of San Francisco.
  9. Futagami, Koichi & Shibata, Akihisa, 1999. "Welfare effects of bubbles in an endogenous growth model," Research in Economics, Elsevier, vol. 53(4), pages 381-403, December.
  10. Azariadis, Costas & Reichlin, Pietro, 1996. "Increasing returns and crowding out," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 847-877, May.
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Citations

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Cited by:
  1. Takayuki Ogawa, 2005. "Welfare Analysis of Debt Policy during Recessions," ISER Discussion Paper 0642, Institute of Social and Economic Research, Osaka University.
  2. Arai, Real, 2008. "Productive government expenditure and fiscal sustainability," MPRA Paper 8553, University Library of Munich, Germany.
  3. Ererdem, Ozgür Kaan, 2010. "Public deficit sustainability, public debt and monetization in an endogenous growth model: an application for Turkey," Economics Papers from University Paris Dauphine 123456789/4341, Paris Dauphine University.

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