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Dynamic analysis of reductions in public debt in an endogenous growth model with public capital

Author

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  • Noritaka Maebayashi

    (Graduate School of Economics, Osaka University)

  • Takeo Hori

    (College of Economics, Aoyama Gakuin University)

  • Koichi Futagami

    (Graduate School of Economics, Osaka University)

Abstract

We construct an endogenous growth model with productive public capital and government debt when government debt is adjusted to the target level. We examine how reducing public debt in an economy with a large public debt affects the transition of the economy and welfare. We find that the government faces the following trade off when reducing its debt. In the short run, public investment is reduced to decrease the debt and this has a negative effect on welfare. However, as the interest payments on the debt decrease, public investment begins to increase. Eventually, the government can increase the amount of public investment by more than before. This has a positive effect on welfare, implying that reducing the debt is welfare improving. Furthermore, we find that the adjustment speed of reductions in debt affects welfare crucially. The relationships between the welfare gains and the adjustment speed are U-shaped in many cases. However, they are decreasing monotonically when the tax rate is low and the initial debt?GDP ratio is sufficiently large.

Suggested Citation

  • Noritaka Maebayashi & Takeo Hori & Koichi Futagami, 2012. "Dynamic analysis of reductions in public debt in an endogenous growth model with public capital," Discussion Papers in Economics and Business 12-08, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1208
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    3. Modesto, Leonor & Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2021. "Growth and instability in a small open economy with debt," Mathematical Social Sciences, Elsevier, vol. 112(C), pages 26-37.
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    6. Maebayashi, Noritaka, 2021. "Paces of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach," MPRA Paper 109059, University Library of Munich, Germany.
    7. Alessandro Piergallini, 2021. "Fiscal Stimulus of Last Resort," Papers 2104.02753, arXiv.org.
    8. Keiichi Morimoto & Takeo Hori & Noritaka Maebayashi & Koichi Futagami, 2017. "Debt Policy Rules in an Open Economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 158-177, February.
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    12. Maebayashi, Noritaka, 2021. "The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach," MPRA Paper 112593, University Library of Munich, Germany, revised 30 Feb 2022.
    13. Kazutoshi Miyazawa & Hikaru Ogawa & Toshiki Tamai, 2018. "Tax Competition and Fiscal Sustainability," CIRJE F-Series CIRJE-F-1104, CIRJE, Faculty of Economics, University of Tokyo.
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    More about this item

    Keywords

    Reductions in public debt; Debt policy rule; Public capital; Endogenous Growth;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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