Debt and growth: Is there a non-monotonic relation?
In this note we theoretically investigate the question of whether the relationship between public debt and economic growth is characterized by an inverse U-shaped functional form. Starting point of our analysis is the paper by Checherita-Westphal et al. (2012) who present an endogenous growth model with public capital and public debt that displays a hump-shaped relation between debt and economic growth. We highlight the mechanism that generates this outcome and we generalize their model by allowing for a more general debt policy. We demonstrate that this non-monotonic relation only holds if public deficits are exogenously fixed and exactly equal to public investment at each point in time. With a more general debt policy, one realizes that smaller public deficits and lower public debt always lead to a higher balanced growth rate. Thus, starting from a situation where the public deficit equals public investment, governments can raise the long-run growth rate by reducing their deficits.
Volume (Year): 33 (2013)
Issue (Month): 1 ()
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- Alexandru Minea & Patrick Villieu, 2009. "Borrowing to Finance Public Investment? The 'Golden Rule of Public Finance' Reconsidered in an Endogenous Growth Setting," Fiscal Studies, Institute for Fiscal Studies, vol. 30(1), pages 103-133, 03.
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NBER Working Papers
15639, National Bureau of Economic Research, Inc.
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- Checherita-Westphal, Cristina & Rother, Philipp, 2010. "The impact of high and growing government debt on economic growth: an empirical investigation for the euro area," Working Paper Series 1237, European Central Bank.
- Alfred Greiner, 2011. "Economic Growth, Public Debt and Welfare: Comparing Three Budgetary Rules," German Economic Review, Verein für Socialpolitik, vol. 12(2), pages 205-222, 05.
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