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Effect on potential growth of non-sustainable public debt dynamics: an application to France

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  • Frédéric Gonand

    (CECO - Laboratoire d'économétrie de l'École polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper assesses the impact on potential growth up to 2020 of possible future budget deficit dynamics in France, with new ageing-related expenditures financed exclusively by debt. The methodology calibrates a standard analytical model with production function and proportional taxes using national accounts. It documents the intuition according to which debt-building significantly crowds out productive capital accumulation. Simulations suggest that a crowding-out adjusted (public debt/GDP) ratio should keep increasing significantly, reaching 97% in 2020 at unchanged policies. It would stabilize around 60% only if sizeable primary surpluses (excluding new ageing-related expenditures) of 1.25% GDP were achieved on average. Yet the detrimental impact on potential growth of loose budget policies combined with new ageing-related expenditures financed only by debt would remain limited: around -0.1% GDP per year on average

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  • Frédéric Gonand, 2005. "Effect on potential growth of non-sustainable public debt dynamics: an application to France," Working Papers hal-00242973, HAL.
  • Handle: RePEc:hal:wpaper:hal-00242973
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00242973
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    File URL: https://hal.archives-ouvertes.fr/hal-00242973/document
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    References listed on IDEAS

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    1. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
    2. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," American Economic Review, American Economic Association, vol. 90(2), pages 120-125, May.
    3. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-691, September.
    4. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
    5. Thai-Thanh Dang & Pablo Antolín & Howard Oxley, 2001. "Fiscal Implications of Ageing: Projections of Age-Related Spending," OECD Economics Department Working Papers 305, OECD Publishing.
    6. Evans, Paul, 1991. "Is Ricardian Equivalence a Good Approximation?," Economic Inquiry, Western Economic Association International, vol. 29(4), pages 626-644, October.
    7. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    8. Joaquim Oliveira Martins & Frédéric Gonand & Pablo Antolín & Christine de la Maisonneuve & Kwang-Yeol Yoo, 2005. "The Impact of Ageing on Demand, Factor Markets and Growth," OECD Economics Department Working Papers 420, OECD Publishing.
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    Cited by:

    1. Frédéric Gonand, 2006. "Une politique budgétaire keynésienne neutralisant les stabilisateurs automatiques en haut de cycle : le cas de la France en 2000-2001," Working Papers hal-00243039, HAL.

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