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On the (de)Stabilizing Effect of Public Debt In a Ramsey Model with Heterogeneous Agents

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Author Info

  • Kazuo Nishimura

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, and KIER, Kyoto University)

  • Carine Nourry

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France)

  • Thomas Seegmuller

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS)

  • Alain Venditti

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)

Abstract

We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality a ecting utility which is nanced by income tax and public debt. We show that public debt considered as a xed portion of GDP can have a stabilizing or destabilizing e ect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic uctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent uctuations without debt.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2014-03.pdf
File Function: First version, 2014
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Bibliographic Info

Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2014-03.

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Length: 25pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:kob:dpaper:dp2014-03

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Keywords: Endogenous cycles; heterogeneous agents; public spending; public debt; borrowing constraint;

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References

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  1. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
  2. Robert Becker & Stefano Bosi & Cuong Le Van & Thomas Seegmuller, 2014. "On existence and bubbles of Ramsey equilibrium with borrowing constraints," Working Papers 2014-105, Department of Research, Ipag Business School.
  3. Bosi, Stefano & Seegmuller, Thomas, 2010. "On the Ramsey equilibrium with heterogeneous consumers and endogenous labor supply," Journal of Mathematical Economics, Elsevier, vol. 46(4), pages 475-492, July.
  4. Jang-Ting Guo & Sharon G. Harrison, 2008. "Useful Government Spending and Macroeconomic (In)stability under Balanced-Budget Rules," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(3), pages 383-397, 06.
  5. Sorger, Gerhard, 2002. "On the Long-Run Distribution of Capital in the Ramsey Model," Journal of Economic Theory, Elsevier, vol. 105(1), pages 226-243, July.
  6. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Debt and Growth Revisited," MPRA Paper 24376, University Library of Munich, Germany.
  7. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
  8. Becker, Robert A & Foias, Ciprian, 1994. "The Local Bifurcation of Ramsey Equilibrium," Economic Theory, Springer, vol. 4(5), pages 719-44, August.
  9. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.
  10. Miguel A. Le�n-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-57, September.
  11. Kazuo Nishimura & Carine Nourry & Thomas Seegmuller & Alain Venditti, 2013. "Public Spending as a Source of Endogenous Business Cycles in a Ramsey Model with Many Agents," AMSE Working Papers 1314, Aix-Marseille School of Economics, Marseille, France, revised 08 Feb 2013.
  12. Thomas Herndon & Michael Ash & Robert Pollin, 2013. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff," Working Papers wp322, Political Economy Research Institute, University of Massachusetts at Amherst.
  13. Becker, Robert A & Boyd, John H, III & Foias, Ciprian, 1991. "The Existence of Ramsey Equilibrium," Econometrica, Econometric Society, vol. 59(2), pages 441-60, March.
  14. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
  15. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
  16. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
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