Is Public Debt Growth-Enhancing or Growth-Reducing?
AbstractTo understand mixed evidence provided by empirical studies for the relationship between the accumulation of public debt and economic growth, it is necessary to consider not only the crowd-out effect of public debt on economic growth but also the growth-enhancing crowd-in effect that cannot be uncovered by the traditional theoretical achievements. We develop a dynamic general equilibrium model with infinitely lived agents and derive an inverted U-shaped relationship between the accumulation of public debt and economic growth. The analysis focuses on both crowd-out and crowd-in effects that public debt has on private investment in a financially constrained economy and clarifies the mechanism inducing the inverted U-shaped relationship in the growth process. When the public debt-to-GDP ratio is below a certain threshold level, the crowd-in effect dominates the crowd-out effect and the accumulation of public debt promotes economic growth. When the public debt-to-GDP ratio exceeds the threshold level, the accumulation of public debt begins to hinder economic growth with the crowd-out effect dominating the crowd-in effect.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 884.
Date of creation: Jan 2014
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Economic growth; Public debt; Crowd-in effect; Financial market imperfections;
Find related papers by JEL classification:
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-01-17 (All new papers)
- NEP-DGE-2014-01-17 (Dynamic General Equilibrium)
- NEP-FDG-2014-01-17 (Financial Development & Growth)
- NEP-GRO-2014-01-17 (Economic Growth)
- NEP-MAC-2014-01-17 (Macroeconomics)
- NEP-PBE-2014-01-17 (Public Economics)
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