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Simple Dynamics of Public Debt with Productive Public Goods

  • Pierre-Richard Agénor
  • Devrim Yilmaz

This paper analyzes the dynamics of public debt in a simple two-period overlapping generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge under that rule are characterized. The analysis is then extended to consider the case of an endogenous risk premium, a generalized golden rule, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving the allocation of resources to specific types of public investment, even in a context of fiscal retrenchment.

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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 165.

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Length: 43 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:man:cgbcrp:165
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  1. Sugata Ghosh & Charles Nolan, 2007. "The Impact Of Simple Fiscal Rules In Growth Models With Public Goods And Congestion," Manchester School, University of Manchester, vol. 75(5), pages 634-651, 09.
  2. Real Arai, 2011. "Productive Government Expenditure and Fiscal Sustainability," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(4), pages 327-351, December.
  3. Balazs Egert & Tomasz Kozluk & Douglas Sutherland, 2009. "Infrastructure and Growth: Empirical Evidence," William Davidson Institute Working Papers Series wp957, William Davidson Institute at the University of Michigan.
  4. Bertrand Candelon & Gilbert Colletaz & Christophe Hurlin, 2013. "Network Effects and Infrastructure Productivity in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(6), pages 887-913, December.
  5. Lancia, Francesco & Russo, Alessia, 2010. "A Dynamic Politico-Economic Model of Intergenerational Contracts," MPRA Paper 24795, University Library of Munich, Germany.
  6. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
  7. Futagami, Koichi & Iwaisako, Tatsuro & Ohdoi, Ryoji, 2008. "Debt Policy Rule, Productive Government Spending, And Multiple Growth Paths," Macroeconomic Dynamics, Cambridge University Press, vol. 12(04), pages 445-462, September.
  8. Ghosh, Sugata & Mourmouras, Iannis A., 2004. "Endogenous growth, welfare and budgetary regimes," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 623-635, December.
  9. Pedro R.D. Bom & Jenny E. Ligthart, 2014. "What Have We Learned From Three Decades Of Research On The Productivity Of Public Capital?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 889-916, December.
  10. Annicchiarico, Barbara & Giammarioli, Nicola, 2004. "Fiscal rules and sustainability of public finances in an endogenous growth model," Working Paper Series 0381, European Central Bank.
  11. Michael Brauninger, 2005. "The Budget Deficit, Public Debt, and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 827-840, December.
  12. Stefan Collignon, 2010. "Fiscal Policy Rules and the Sustainability of Public Debt in Europe," RECON Online Working Papers Series 28, RECON.
  13. Greiner, Alfred & Semmler, Willi, 2000. "Endogenous Growth, Government Debt and Budgetary Regimes," Journal of Macroeconomics, Elsevier, vol. 22(3), pages 363-384, July.
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