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

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Listed:
  • 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)

Abstract

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.

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-Rev.3, Osaka University, Graduate School of Economics, revised Aug 2015.
  • Handle: RePEc:osk:wpaper:1208r3
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    More about this item

    Keywords

    Fiscal consolidation; Debt policy rule; Public capital; Welfare; Endogenous growth;
    All these keywords.

    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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