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On the (de)Stabilizing Effect of Public Debt In a Ramsey Model with Heterogeneous Agents

  • Kazuo Nishimura

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, and KIER, Kyoto University)

  • Carine Nourry

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France)

  • Thomas Seegmuller

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS)

  • Alain Venditti

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)

We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality a ecting utility which is nanced by income tax and public debt. We show that public debt considered as a xed portion of GDP can have a stabilizing or destabilizing e ect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic uctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent uctuations without debt.

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File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2014-03.pdf
File Function: First version, 2014
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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2014-03.

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Length: 25pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:kob:dpaper:dp2014-03
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