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Sustainability of public debt, investment subsidies, and endogenous growth with heterogeneous firms and financial frictions

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  • MAEBAYASHI, NORITAKA

Abstract

This study investigates the effect of public debt on growth, interest rate, and sustaibility of public debt in a very simple endogenous growth model with financial imperfection and the firm heterogeneity. Increases in public debts cause higher real interest rates through financial markets and reduces both the number of firms and private investment, leading to lower long-run growth. It makes public debt less sustainable when public debt is very large. This study also examine the effect of investment subsidy financed by public debt. It hinder economic growth in the long-run although they affect posively on growth in the short run. Therefore, investment subsidy should not be financed by public debt but tax increases.

Suggested Citation

  • Maebayashi, Noritaka, 2024. "Sustainability of public debt, investment subsidies, and endogenous growth with heterogeneous firms and financial frictions," MPRA Paper 120884, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:120884
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    More about this item

    Keywords

    Sustainability of public debt; Finantial frictions; Firm heterogeneity; Investment subsidies;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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