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Debt Policy Rule, Productive Government Spending, And Multiple Growth Paths: A Note

Listed author(s):
  • Minea, Alexandru
  • Villieu, Patrick

In a very interesting endogenous growth model, Futagami, Iwaisako, and Ohdoi [Macroeconomic Dynamics 12 (2008), 445-462] study the long-run growth effect of borrowing for public investment. Their model exhibits (i) the ltiplicity of balanced growth paths (BGPs) in the long run (two steady states) and (ii) a possible indeterminacy of the transition path to the high-growth BGP. The goal of this note is to show that their results depend on a sharp assumption, namely the definition of the public debt target as a ratio to private capital. If the target is defined in terms of public debt-to-GDP ratio, both results vanish: the model exhibits a unique BGP (no multiplicity) and the adjustment path to this unique equilibrium is determinate (no indeterminacy).

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 17 (2013)
Issue (Month): 04 (June)
Pages: 947-954

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Handle: RePEc:cup:macdyn:v:17:y:2013:i:04:p:947-954_00
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