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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 debt, in which government debt is gradually adjusted to the target level. We examine how the government fs debt reductions affect the transitional dynamics and welfare of the economy. We show that fiscal consolidation has contractionary ef- fects on the economy in the short run, but has positive long-run effects on the growth of key macroeconomic variables. Fiscal consolidation based only on expenditure cuts improves social welfare and attains larger welfare gains than consolidation that com- bines a tax increase with expenditure cuts. Importantly, under fiscal consolidation based only on expenditure cuts, as the size and speed of the debt reduction increase, welfare improves even further.

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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.2.

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Length: 35 pages
Date of creation: Apr 2012
Date of revision: Jan 2014
Handle: RePEc:osk:wpaper:1208r2
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