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On (Non-)Neutrality of Public Debt in Growing Economies

In: Inequality and Finance in Macrodynamics

Author

Listed:
  • Alfred Greiner

    (Bielefeld University)

Abstract

In this paper we analyze effects of public debt on the long-run allocation of resources in a basic endogenous growth model with infinitely lived households. The government levies an income tax and issues government bonds to finance unproductive public spending. We demonstrate that in the case of flexible wages and elastic labour supply the balanced growth rate is the higher the smaller the ratio of public debt to GDP for a given income tax rate. When wages are rigid public debt is neutral in the sense that it does not affect the allocation of resources along the balanced growth path. Finally, in both cases the economy is stable only if the government puts a sufficiently high weight on stabilizing public debt.

Suggested Citation

  • Alfred Greiner, 2017. "On (Non-)Neutrality of Public Debt in Growing Economies," Dynamic Modeling and Econometrics in Economics and Finance, in: Bettina Bökemeier & Alfred Greiner (ed.), Inequality and Finance in Macrodynamics, pages 97-119, Springer.
    • Handle: RePEc:spr:dymchp:978-3-319-54690-2_5
    DOI: 10.1007/978-3-319-54690-2_5
    as

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