Fiscal Policy in an Endogenous Growth Model
In a neoclassical growth model, it is possible to make a case for public debt because a balanced growth path may be dynamically inefficient. This paper shows that this possibility no longer holds in an endogenous growth model with constant external returns to capital. It is shown that an increase in public debt reduces the growth rate, so there always exists a future generation that will be harmed, and that a reduction in public debt, although it increases the growth rate, cannot be Pareto-improving--one current generation must be harmed. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 107 (1992)
Issue (Month): 4 (November)
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