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

Listed author(s):
  • Noritaka Maebayashi

    ()

    (Faculty of Economics and Business Administration, The University of Kitakyushu)

  • Takeo Hori

    ()

    (College of Economics, Aoyama Gakuin University)

  • Koichi Futagami

    ()

    (Graduate School of Economics, Osaka University)

We construct an endogenous growth model that includes productive public capital and government debt. We assume that the government debt-to-GDP ratio is grad- ually adjusted to a target level, re ecting the permanent commitment rules in the Stability and Growth Pact or the Maastricht Treaty in the EU (i.e., the well-known 60% rule). These rules affect government borrowing and public investment. Here, we examine the welfare implications of the permanent commitment rules. We nd that scal consolidation based on the rules improves social welfare. Moreover, the improvement in welfare accelerates as scal consolidation progresses more rapidly. Lastly, we also discuss and derive the optimal long-run debt-to-GDP ratio.

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File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1208R3.pdf
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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.3.

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Length: 34 pages
Date of creation: Apr 2012
Date of revision: Aug 2015
Handle: RePEc:osk:wpaper:1208r3
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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