Government spending in a model where debt effects output gap
In this paper I present a simple model of government spending where the level of government debt affects the output gap. The structure of the economy is specified such that the output gap has a structural part, which is a function of debt. Based on empirical research, the structural part is assigned a specific functional form. The government faces an optimization problem where they attempt to close the output gap. The optimal change in government debt is found by solving a nonlinear equation. Numerical results show that the optimal change in debt has nonlinear behaviour. The solution to the unconstrained problem is an alternating equilibrium, whereas the solution to the constrained problem is a non linear cycle around the government's upper bound of admissible debt.
|Date of creation:||12 Apr 2012|
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- Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009.
"This Time Is Different: Eight Centuries of Financial Folly,"
Princeton University Press,
edition 1, number 8973.
- Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
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