Public debt and economic growth: what do neoclassical growth models teach us?

This paper aims to quantify the crowding-out effect of public debt and the related loss in long-run output in neoclassical growth models. To accomplish this task, we incorporate the government sector into the Ramsey–Cass–Koopmans (RCK) model, the Blanchard model and the Solow model, which differ only in their assumptions concerning the consumption behaviour of households. We also introduce a general framework that is capable of gauging the burden of public debt in a neoclassical world in the case of any type of consumption behaviour. Our results are threefold. First, contrary to the RCK model, public debt reduces long-run output in the Blanchard model and the Solow model, although to a different extent: the crowding-out effect is marginal in the former, whereas it can be very large in the latter. Second, the burden of public debt is country-specific depending crucially on the saving rate and the population growth rate. Finally, in developed countries the upper limit of the output loss related to public debt is moderate at best even if distortionary taxes are taken into account.     

Government expenditure,external and domestic public debt,and economic growth

This paper analyzes the relationship between government expenditure, tax on returns to assets, public debt, and growth in an endogenous growth model. Public debt is composed of two components, domestic debt and external debt. We show conditions for existence, uniqueness, and multiplicity of the steady states. More precisely, existence of steady state requires a sufficiently high productivity and a sufficiently low tax on returns to assets. We also provide the effects of an increase in the tax rate on returns to assets on the steady state. In particular, the relation between public spending and the tax rate has a bell shape. Domestic debt unambiguously increases with tax whereas external debt displays an inverted U‐shaped curve. A high tax rate leads to a reallocation of public debt in favor of domestic debt (to the detriment of external debt). The effect of taxation on consumption (and production) also displays a nonlinear pattern when the output elasticity of capital is lower than unity (the effect is monotonously increasing if this elasticity is unity). We also derive the conditions under which a tax increase can boost or reduce the balanced growth rate.     

经济发展、老龄化与政府债务累积的加速效应*

本文基于世界63个经济体1996—2016年的面板数据,运用静态、动态门槛回归模型研究了老龄化对政府债务规模的加速效应。研究表明,从长期来看,老龄化不仅能对政府债务产生显著的正向冲击,而且对于相对发达的经济体而言,老龄化对政府债务累积的影响更大。文章政策含义是,为了减缓加速效应,一方面我们需要通过提高全要素生产率、优化税收结构、完善国有资本划转等方式保持政府收入稳健增长,另一方面需要打破养老支出刚性,使其增长幅度与经济增速和政府收入增速相匹配。     

Keynes and a post-Keynesian controversy over the effect of debt on income expansion

The paper considers arguments of Robertson (1938) and Asimakopulos (1983) that the Keynesian multiplier expansion of output may be constrained by debt implicitly incurred in the financing of autonomous investment necessary to start the multiplier process. The task of this essay is to show that within the ‘short-period’ and static analytical framework of Keynes, this line of reasoning regarding the adverse effects of debt on multiplier-induced expansions of output is unwarranted. Nevertheless it is concluded that if the Keynesian framework is abandoned in favour of a dynamic framework in the manner of a steady trend rate of growth - a choice dependent on how one conceives of the economy, as inherently static or dynamic - then such arguments have troubling implications. In particular, the dependence of Keynes's approach on credit and hence debt forges links between ‘short-periods' whose distinctness from one another is crucial to Keynes's result.     

The Budget Deficit, Public Debt, and Endogenous Growth

This paper analyzes the effects of public debt on endogenous growth in an overlapping generations model. The government fixes the budget deficit ratio. If the deficit ratio stays below a critical level, then there are two steady states where capital, output, and public debt grow at the same constant rate. An increase in the deficit ratio reduces the growth rate. If the deficit ratio exceeds the critical level, then there is no steady state. Capital growth declines continuously, and capital is driven down to zero in finite time.     

Is fiscal austerity really self-defeating?

This paper analyzes local and global equilibrium dynamics in an optimizing endogenous growth model under expenditure-based fiscal austerity feedback policies expressed relative to the private capital stock—prescribing spending cuts in reaction to public debt accumulation. Because the present value of equilibrium primary surpluses turns to be a nonlinear function of debt, two steady state equilibria are shown to emerge, one exhibiting low debt and high growth, one exhibiting high debt and low growth. Local analysis reveals that the low-debt/high-growth steady state is saddle-path stable while the high-debt/low-growth steady state is unstable—the latter thus indicating the possibility of self-defeating austerity, characterized by off-equilibrium upward spirals in debt because of persistent policy-induced adverse effects on growth dividends and fiscal revenues. However, when global nonlinear dynamics are taken into account, it is demonstrated that the two steady states are endogenously connected. In particular, global analysis reveals that even if the high-debt/low-growth steady state is locally unstable, there exists a unique and possibly nonmonotonic saddle connection making the economy converge to the low-debt/high-growth steady state. The existence of the saddle connection guarantees global determinacy of perfect foresight equilibrium should the high-debt/low-growth steady state be a node, ruling out multiple explosive paths incompatible with the government's intertemporal budget constraint and the private agents' transversality condition. The foregoing results are robust with respect to the adoption of an output-based—rather than a capital-based—policy function as long as the rule is nonlinear and sufficiently reactive to debt changes.     

Public Expenditure,Environment, and Economic Growth

This paper attempts to develop a model of endogenous growth with special consideration to the role of productive public expenditure in the presence of congestion effect of private capital and environmental pollution. We analyze the properties of the optimal fiscal policy in the steady‐state equilibrium when the level of production of the final good is the source of emission. Government allocates its income tax revenue between pollution abatement expenditure and productive public expenditure. In the steady‐state equilibrium, optimum ratio of productive public expenditure to national income is less than the competitive output share of the public input; and this ratio varies inversely with the magnitude of the emission‐output coefficient. The steady‐state equilibrium appears to be a saddle point; and the market economy growth rate is not necessarily less than the socially efficient growth rate in the steady‐state equilibrium.     

Environmental Quality,Public Debt and Economic Development

This article analyzes the consequences on capital accumulation and environmental quality of environmental policies financed by public debt. A public sector of pollution abatement is financed by a tax or by public debt. We show that if the initial capital stock is high enough, the economy monotonically converges to a long-run steady state. On the contrary, when the initial capital stock is low, the economy is relegated to an environmental poverty trap. We also explore the implications of public policies on the trap and on the long-run stable steady state. In particular, we find that government should decrease debt and increase pollution abatement to promote capital accumulation and environmental quality at the stable long-run steady state. Finally, a welfare analysis shows that there exists a level of public debt that allows a long run steady state to be optimal.     

A note on the sustainability of primary budget deficits

This note studies the sustainability of primary budget deficits in a situation where the public sector has also incurred debt to the private sector. It shows that if the rate of pure time preference is small relative to the population growth rate, if public consumption constitutes a modest fraction of output, and if the primary budget deficit is sufficiently small, then it is also sustainable, and the associated steady state is locally stable.     

Social security and savings plans in overlapping-generations models

This paper examines the impact of social security and saving plans on a simple overlapping-generations model with no uncertainty. The model is related to, and provides a reconciliation of, the Diamond and Samuelson–Gale models of public debt and public capital. Savings plans and pay-as-you-go social security are seen to have quite different effects depending on the assumptions governing the growth rates of public debt and capital, and it is also shown that the social security program proposed by Feldstein is infeasible in the steady state he adopts as a starting-point.     

Capital market imperfections in a monetary growth model

Summary. We consider a monetary growth model essentially identical to that of Diamond (1965) and Tirole (1985), except that we explicitly model credit markets, a credit market friction, and an allocative function for financial intermediaries. These changes yield substantially different results than those obtained in more standard models. In particular, if any monetary steady state equilibria exist, there are generally two of them; one of these has a low capital stock and output level, and it is necessarily a saddle. The other steady state has a high capital stock and output level; either it is necessarily a sink, or its stability properties depend on the rate of money creation. It follows that monetary equilibria can be indeterminate, and nonconvergence phenomena can be observed. Increases in the rate of money creation reduce the capital stock in the high-capital-stock steady state. If the high-capital-stock steady state is not a sink for all rates of money growth, then increases in the rate of money growth can induce a Hopf bifurcation. Hence dynamical equilibria can display damped oscillation as a steady state equilibrium is approached, and limit cycles can be observed as well. In addition, in the latter case, high enough rates of inflation induce the kinds of “crises” noted by Bruno and Easterly (1995): when inflation is too high there are no equilibrium paths approaching the high-activity steady state. Received: November 18, 1995; revised version: March 26, 1996     

Aggregate stability under a budget rule and labor mobility

Whether a balanced budget rule stabilizes or destabilizes an economy depends on various factors such as the production function or the instrument used to balance the budget. This paper argues that migration, which has widely been neglected in the literature, also affects equilibrium properties. We study the effect of pro-cyclical labor mobility in a neoclassical growth model with public debt and a balanced budget requirement. Labor mobility can destabilize the economy due to external effects. After a negative shock hits the economy, living abroad becomes relatively more attractive, resulting in out-migration. This increases per capita public debt as migrants leave behind their implicit liabilities. The government increases tax rates to satisfy the balanced budget requirement, which further depresses the economy and increases out-migration. The destabilizing effect of public debt kicks in at only slightly higher debt levels than the ones observed in the Euro area after the financial crisis.     

Nominal debt as a burden on monetary policy

We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed. We also analyze the case where monetary policy is time inconsistent even when debt is indexed. In this case, with nominal debt, the sequential optimal policy converges to a time-consistent steady state with positive—or negative—debt, depending on the value of the intertemporal elasticity of substitution. Welfare can be higher if debt is nominal rather than indexed and the level of debt is not too high.     

Fiscal policies, environmental pollution and economic growth

This paper develops a model of endogenous economic growth with special consideration to the role of productive public expenditure and environmental pollution; and analyses the properties of optimal fiscal policy in the steady state growth equilibrium. We consider the level of consumption as the source of pollution. Government allocates its tax revenue between pollution abatement expenditure and productive public expenditure. Optimum ratio of productive public expenditure to national income is equal to the competitive output share of the public input, when productive public expenditure is depicted as tax revenue minus abatement expenditure. However, the proportional income tax rate exceeds the competitive output share of the public input. There is no conflict between the social welfare maximizing solution and the growth rate maximizing solution in the steady state growth equilibrium. The unique steady state growth equilibrium appears to be a saddle-point when the growth rate is above a critical level and the steady state equilibrium growth rate in the market economy is not necessarily lower than the socially efficient growth rate.     

China's Growing Government Debt in a Computable Overlapping Generations Model

This paper simulates the effects of China's growing government debt in a computable equilibrium model of overlapping generations. Our model assumes that the government increases debt to finance its spending in the short run, and then increases taxes or cuts spending to keep the debt–GDP ratio constant. The spending‐driven government debt increases public capital and output in the short run, but decreases private investment, total capital stock, output, and net exports in the long run, and makes the future generations worse off. Among various means of debt control, a decrease in government spending seems to be the least harmful to private investment, capital stock, and output while an increase in capital taxation is most detrimental.     

Sustainable fiscal strategies under changing demographics

This paper develops an overlapping generations model to evaluate, first, the steady state growth-maximizing level of public debt around which an economy needs to stabilise; second, how the optimal level of public debt varies as a function of key population parameters; third, how fiscal rules designed to stabilise the economy around that debt level need to vary with the population parameters; and, fourth, how well the model performs as a reasonable and plausible representation of the advanced economies that face fiscal strain and deteriorating demographics. The main conclusion is: despite diminished fiscal space and flexibility due to deteriorating population parameters, a relatively benign steady state is feasible and available under mild fiscal restraints. The bigger problem will be how to get there without financial or fiscal breakdowns along the way. We offer some political economy perspectives on how best to manage that risk.     

Fiscal policy reforms in general equilibrium: The case of Greece

This paper quantifies the macroeconomic and welfare implications of (i) changes in the tax-spending mix and (ii) debt consolidation policies. The setup is a neoclassical growth model augmented with a relatively rich public sector. The model is calibrated to the Greek economy. The results suggest that, if the goal of fiscal policy is to stimulate the economy and increase welfare by changing the tax mix, then it should decrease the tax rate on labour income and increase the consumption tax rate. While higher public investment spending is good for the economy, it is lower public consumption spending that is found to be expansionary. The results also suggest that both tax- and expenditure-based debt consolidation policies lead to worse economic activity in the short run, but they have strong beneficial effects in the medium and long run when the consolidation period finishes.     

Capital flight from sub‐Saharan Africa: linkages with external borrowing and policy options

Even as African countries became increasingly indebted, they experienced large‐scale capital flight. Some of this was legitimately acquired capital fleeing economic and political uncertainties; some was illegitimately acquired wealth spirited to safer havens abroad. This paper presents new estimates of the magnitude and timing of capital flight from 33 sub‐Saharan African countries from 1970 to 2004. We then analyze its determinants, including linkages to external borrowing. Our results confirm that sub‐Saharan Africa is a net creditor to the rest of the world, in that the subcontinent’s private external assets exceed its public external liabilities: total capital flight amounted to $443 billion (in 2004 dollars), compared to the external debt of $195 billion. Econometric analysis indicates that for every dollar in external loans to Africa in this period, roughly 60 cents flowed back out as capital flight in the same year, a finding that suggests the existence of widespread debt‐fueled capital flight. The results also show a debt‐overhang effect, as increases in the debt stock spur additional capital flight in later years. In addition to policies for recovery of looted wealth and repatriation of externally held assets, we discuss the need for policies to differentiate between legitimate and odious debts, both to ease current burdens on African countries and to improve international financial governance in the future.     

Countercyclical taxes in a monopolistically competitive environment

In the context of a neoclassical growth model with monopolistic competition, this paper studies the stabilizing effects of countercyclical tax policy when the income tax rate has an additional role of financing government budget deficits. Consistent with the conventional wisdom, countercyclical taxes generally reduce aggregate volatility, unless the fiscal response to debt accumulation is weak. The presence of monopoly power enhances these effects. Even when automatic stabilizers successfully stabilize business cycle fluctuations, countercyclical taxes are welfare inferior, due to reduced precautionary saving motives. While, if the fiscal response to debt is weak and countercyclical tax policy destabilizing, the increased precautionary saving motive is not welfare enhancing as the asset accumulated is government debt rather than capital. These results are generally robust. Nominal inertia may, however, dominate the precautionary saving mechanism.     

Political economy of taxation,debt ceilings,and growth

This study presents voting on policies, including labor and capital income taxes and public debt, in an overlapping-generations model with physical and human capital accumulation, and analyzes the effects of a debt ceiling on a government's policy formation and its impact on growth and welfare. The results show that the debt ceiling induces the government to shift the tax burdens from the older to younger generations, but stimulates physical capital accumulation and may increase public education expenditure, resulting in a higher growth rate. Alternatively, the debt ceiling is measured from the viewpoint of a benevolent planner and lowering the debt ceiling (i.e., tightening fiscal discipline) makes it possible for the government to approach the planner's allocation in an aging society.