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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 and Osaka School of International Public Policy (OSIPP).
    • Handle: RePEc:osk:wpaper:1208
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    Cited by:

    1. repec:eee:reveco:v:51:y:2017:i:c:p:545-561 is not listed on IDEAS
    2. Koichi Futagami & Kunihiko Konishi, 2018. "Dynamic Analysis of Budget Policy Rules in Japan," Bank of Japan Working Paper Series 18-E-3, Bank of Japan.

    More about this item

    Keywords

    Reductions in public debt; Debt policy rule; Public capital; Endogenous Growth;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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