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Simple Dynamics of Public Debt with Productive Public Goods

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  • Pierre-Richard Agénor
  • Devrim Yilmaz

Abstract

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.

Suggested Citation

  • Pierre-Richard Agénor & Devrim Yilmaz, 2012. "Simple Dynamics of Public Debt with Productive Public Goods," Centre for Growth and Business Cycle Research Discussion Paper Series 165, Economics, The Univeristy of Manchester.
  • Handle: RePEc:man:cgbcrp:165
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr165.pdf
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