Public capital,deficit financing,and economic growth in a stochastic economy |
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| Institution: | 1. Institut für Theoretische Physik, Leibniz Universität Hannover, Appelstraße 2, 30167 Hannover, Germany;2. Riemann Center for Geometry and Physics, Leibniz Universität Hannover, Appelstraße 2, 30167 Hannover, Germany;1. Michigan State University, Department of Agricultural, Food and Resource Economics, Morrill Agriculture Hall, East Lansing, MI 48824, USA;2. Yale University, School of Forestry and Environmental Studies, USA;3. University of Wyoming, Department of Economics and Finance, USA;1. Department of Economics and EPRU, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark;2. Department of Economics, University of Graz, Universitaetsstrasse 15, RESOWI Building F-4, A-8010 Graz, Austria |
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| Abstract: | This paper examines the relationship among deficit-financing fiscal policy, risk and economic growth in a stochastic endogenous growth model with private and public capital. We show that there are positive balanced-growth rate and a debt-to-GDP ratio that depend on deep parameters such as the income tax rate and the standard deviation of the growth rate of private and public capital. Investment and fiscal shocks influence the mean and variance of the growth rate and the debt dependency rate through portfolio changes and capital accumulation. In particular, an increase in the risk of private investment destabilizes the economy and reduces the mean growth rate if the portfolio change is drastic, and this increase in risk increases the debt-to-GDP ratio. In contrast, an increase in the income tax rate stabilizes the economy, increases the mean growth rate, and has a positive or negative effect on the debt-to-GDP ratio according to the ratio of public to private capital if the income tax rate is sufficiently small. |
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| Keywords: | Public capital National debt Stochastic growth H54 H60 O40 |
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