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Productive Government Expenditure and Fiscal Sustainability

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  • Real Arai

Abstract

We consider an overlapping-generations model in which public spending directly contributes to an increase in productivity, as in the model of Barro (1990), and in which the government maintains constant ratios of public spending to GDP and of debt issuance to public spending. We numerically analyze the effects of a change of public-spending/GDP on fiscal sustainability, growth rate, and welfare. First, if that ratio is small, an increase in it makes public debt sustainable. Second, if it is small, then an increase in it is Pareto improving.

Suggested Citation

  • Real Arai, 2011. "Productive Government Expenditure and Fiscal Sustainability," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(4), pages 327-351, December.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(291112)67:4_327:pgeafs_2.0.tx_2-3
    DOI: 10.1628/001522108X614150
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    References listed on IDEAS

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    1. Joshua Aizenman & Reuven Glick, 2006. "Military expenditure, threats, and growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(2), pages 129-155.
    2. Chalk, Nigel A., 2000. "The sustainability of bond-financed deficits: An overlapping generations approach," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 293-328, April.
    3. P R Agénor & D Yilmaz, 2006. "The Tyranny of Rules: Fiscal Discipline, Productive Spending, and Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 73, Economics, The Univeristy of Manchester.
    4. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-625, December.
    5. Futagami, Koichi & Shibata, Akihisa, 1998. "Budget Deficits and Economic Growth," Public Finance = Finances publiques, , vol. 53(3-4), pages 331-354.
    6. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    7. Neil Rankin & Barbara Roffia, 2003. "Maximum Sustainable Government Debt in the Overlapping Generations Model," Manchester School, University of Manchester, vol. 71(3), pages 217-241, June.
    8. Adam, Christopher S. & Bevan, David L., 2005. "Fiscal deficits and growth in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 571-597, April.
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    Citations

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    Cited by:

    1. Maebayashi, Noritaka & Hori, Takeo & Futagami, Koichi, 2017. "Dynamic Analysis Of Reductions In Public Debt In An Endogenous Growth Model With Public Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 21(06), pages 1454-1483, September.
    2. Pierre-Richard Agénor & Devrim Yilmaz, 2012. "Simple Dynamics of Public Debt with Productive Public Goods," Centre for Growth and Business Cycle Research Discussion Paper Series 165, Economics, The Univeristy of Manchester.
    3. Takumi Motoyama, 2017. "Fiscal sustainability under physical and human capital accumulation in an overlapping generations model," Discussion Papers in Economics and Business 17-05, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    4. Atsumasa Kondo, 2016. "Sustainability of Public Debt in an AK Model with Complex Tax System," Discussion Papers CRR Discussion Paper Series A: General 21, Shiga University, Faculty of Economics,Center for Risk Research.
    5. repec:cup:macdyn:v:22:y:2018:i:02:p:501-540_00 is not listed on IDEAS
    6. Arai, Real & Ueda, Junji, 2013. "A numerical evaluation of the sustainable size of the primary deficit in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 59-75.
    7. Glomm, Gerhard & Jung, Juergen & Tran, Chung, 2018. "Fiscal Austerity Measures: Spending Cuts Vs. Tax Increases," Macroeconomic Dynamics, Cambridge University Press, vol. 22(02), pages 501-540, March.
    8. Noritaka Maebayashi & Kunihiko Konishi, 2016. "Sustainability of the public debt and wealth inequality in a general equilibrium model," Discussion Papers in Economics and Business 16-33, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    9. Takaaki Morimoto & Yuta Nakabo & Ken Tabata, 2016. "Population Aging, Fiscal Sustainability and PAYG Pension Reform," Discussion Paper Series 140, School of Economics, Kwansei Gakuin University, revised Feb 2016.
    10. Akira Kamiguchi & Toshiki Tamai, 2017. "Public Investment and Golden Rule of Public Finance in an Overlapping Generations Model," KIER Working Papers 971, Kyoto University, Institute of Economic Research.
    11. repec:dau:papers:123456789/4341 is not listed on IDEAS
    12. Real Arai & Takuma Kunieda & Keigo Nishida, 2014. "Is Public Debt Growth-Enhancing or Growth-Reducing?," KIER Working Papers 884, Kyoto University, Institute of Economic Research.
    13. Atsumasa Kondo, 2016. "Interconnection of Fiscal Policies on Sustainability of Public Debt," Discussion Papers CRR Discussion Paper Series A: General 20, Shiga University, Faculty of Economics,Center for Risk Research.
    14. Yakita, Akira, 2014. "Involuntary unemployment and sustainability of bond-financed fiscal deficit," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 79-93.

    More about this item

    Keywords

    fiscal sustainability; welfare; productive government spending; public debt; endogenous growth;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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