Government spending in a model where debt effects output gap
AbstractIn this paper I present a simple model of government spending where the level of government debt affects the output gap. The structure of the economy is specified such that the output gap has a structural part, which is a function of debt. Based on empirical research, the structural part is assigned a specific functional form. The government faces an optimization problem where they attempt to close the output gap. The optimal change in government debt is found by solving a nonlinear equation. Numerical results show that the optimal change in debt has nonlinear behaviour. The solution to the unconstrained problem is an alternating equilibrium, whereas the solution to the constrained problem is a non linear cycle around the government's upper bound of admissible debt.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 38347.
Date of creation: 12 Apr 2012
Date of revision:
Debt; Macroeconomy; Fiscal; Government Spending; Output Gap; Nonlinear; Numerical Method;
Find related papers by JEL classification:
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
- E00 - Macroeconomics and Monetary Economics - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-02 (All new papers)
- NEP-CMP-2012-05-02 (Computational Economics)
- NEP-MAC-2012-05-02 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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