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

  • Noritaka Maebayashi

    ()

    (Graduate School of Economics, Osaka University)

  • Takeo Hori

    ()

    (College of Economics, Aoyama Gakuin University)

  • Koichi Futagami

    ()

    (Graduate School of Economics, Osaka University)

We construct an endogenous growth model with productive public capital and government debts where government debts are gradually adjusted to target level. We examine how debt-reductions of the government affect the transitional dynamics and welfare of the economy. Fiscal consolidation has contractionary effects on economy in the short run, whereas it has positive long run effects on the growth of key macroeconomic variables. Reductions in the government debts at the expense of public spending improves social welfare. Importantly, as the size of debt-reductions is larger and as the government reduces its debts at a higher speed, the welfare improves more.

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Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 12-08-Rev.

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Length: 37 pages
Date of creation: Apr 2012
Date of revision: Feb 2013
Handle: RePEc:osk:wpaper:1208r
Contact details of provider: Web page: http://www2.econ.osaka-u.ac.jp/library/global/e_HP/e_g_shiryo.html
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