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Spending and Growth: A Modified Debt to GDP Dynamic Model

Author

Listed:
  • Camilla Yanushevsky

    () (University of Maryland, Department of Finance, Robert H. Smith School of Business, College Park, 20742, USA)

  • Rafael Yanushevsky

    () (Research & Technology Consulting, 5106 Danbury Rd., Bethesda, MD 20814, USA)

Abstract

The paper addresses a topical issue – how expansionary fiscal policy affects the debt to GDP ratio. It examines whether the projected future economic growth (stimulated by government spending) is sustained with the resulting national debt. It is discussedif government investment in infrastructure is an effective approach to boost the economy in times of economic downturn. The authors develop the debt to GDP ratio dynamics model and perform a series of simulations (based on US data) to forecast the evolution of the debt to GDP ratio over a 10-year horizon. It is shown that for the data characterizing the current state of the U.S. economy the government investment in infrastructure cannot decrease the debt to GDP ratio.

Suggested Citation

  • Camilla Yanushevsky & Rafael Yanushevsky, 2013. "Spending and Growth: A Modified Debt to GDP Dynamic Model," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 6(3), pages 21-33, December.
  • Handle: RePEc:tei:journl:v:6:y:2013:i:3:p:21-33
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    References listed on IDEAS

    as
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    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    4. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
    5. Cassou, Steven P. & Lansing, Kevin J., 1998. "Optimal fiscal policy, public capital, and the productivity slowdown," Journal of Economic Dynamics and Control, Elsevier, vol. 22(6), pages 911-935, June.
    6. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    7. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
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    9. Hyacinth Eme Ichoku & Chukwuma Agu & John Ele-Ojo Ataguba, 2012. "What do we know about pro-poor growth and regional poverty in Nigeria?," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 5(3), pages 147-172, December.
    10. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
    11. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
    12. Alicia H. Munnell & Leah M. Cook, 1990. "How does public infrastructure affect regional economic performance?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 11-33.
    13. Mehmet Aldonat Beyzatlar & Mehmet Yeşim Kuştepeli, 2011. "Infrastructure, Economic Growth and Population Density in Turkey," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 4(3), pages 39-57, December.
    14. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    15. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    debt dynamics; debt to GDP ratio dynamics; investment in infrastructure; stimulus;

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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