Public investment,national debt,and economic growth: The role of debt finance under dynamic inefficiency

Public investment is a central issue in the dynamic analyses of fiscal policy and economic growth. Debt financing for public investment and its effects have recently received great attention because interest rates have been low, almost invariably remaining below economic growth rates. This paper presents examination of the effects of debt-financed public investment subject to a simple fiscal rule in an overlapping generations model with public capital. This topic includes capital budgeting and the debt–deficit criterion of the Maastricht treaty. We show herein that debt financing for public investment enhances economic growth if an economy is dynamically inefficient and if public capital has a sufficiently large productivity effect. Moreover, it reduces economic growth rates in a dynamically efficient economy. Debt and growth can have a monotonic or non-monotonic relation, depending on the steady-state interest rate, growth rate, and productivity effect of public investment. The findings indicate that debt–growth relations match with controversial empirical evidence. Furthermore, existing generations choose perfect debt finance if dynamic inefficiency exists. In contrast, a balanced budget is preferred in a dynamically efficient economy with low productivity effects of public capital. However, an economy with high productivity effects of public capital might cho ose debt financing. This paper contributes to the elucidation of currently emphasized issues of public investment.     

Foreign debt and economic growth

This paper empirically examines the relationship between government foreign debt and the growth rate of per capita GDP based on a total sample of 77 countries, as well as sub‐samples of various regions. Cross‐sectional estimates of the coefficient of foreign debt based on the total sample have a negative sign, but are not always statistically significant. Available data from African countries indicate that foreign debt and the growth rate of per capita GDP were negatively related at a high level of significance. For industrialized and Latin American sub‐samples, this relationship is negative but statistically insignificant. The sub‐sample Asian and other developing countries show a positive but insignificant relationship. JEL classification: F34, H6, O23.     

Money, endogenous fertility and economic growth

This paper analyzes the issue of money superneutrality through an intertemporal optimizing model of capital accumulation with endogenous fertility, i.e. endogenous population growth. Two elements of this setup invalidate money superneutrality: (i) a demand for fertility that depends on real money balances, and (ii) an inverse relation between capital–labor ratio and population growth. Higher monetary growth increases fertility, since it reduces its opportunity cost, and hence diminishes capital intensity, and per capita output. This reverse Tobin effect is matched by an increase in aggregate capital and output growth rates. In this framework, the optimal monetary growth rule is a “distorted Friedman rule”.     

Government consumption,government debt and economic growth

This paper compares the effects of government consumption and government debt on economic growth using data from 83 countries, including both developed and developing markets, over the period from 1960 to 2014. Linear regressions reveal that the negative effects of government consumption are relatively higher than the negative effects of government debt. A nonlinear investigation further suggests that the restrictions on government expenditure to prevent negative growth are more important for countries with lower trade openness, lower inflation, or greater financial depth, whereas the restrictions on government debt are shown to be more important for countries with higher trade openness, lower inflation or greater financial depth.     

Money,inflation, and optimal economic growth

Using a two-asset model of a growing competitive economy, it is shown that the optimal growth path can be achieved via a policy operating exclusively on the rate of growth of the money stock.     

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.     

Money,government debt,q, and investment

The aim of this study is to analyze empirically the linkages among changes in money and federal debt, Tobin's q variable, and investment expenditures in the United States. The vector autoregressive modeling technique proposed by Hsiao and extended by Caines, Keng, and Sethi is employed. The patterns of Granger-causality from the estimated vector autoregression are consistent with the transmission mechanism outlined by Tobin. Both money and debt Granger-cause q; q in turn causes investment and money and debt's effects upon investment operate primarily through their effects on q. However, neither money nor debt are exogenous.     

Fiscal policy,government debt,and economic growth in the Kaleckian model of growth and distribution

This article presents the Kaleckian model of growth and distribution that sets a budget deficit ratio as an indicator of fiscal policy and examines the short- and long-run effects of an increase in budget deficits and a rise in income tax rates on the economy. The key short-run outcomes are as follows. First, expanded budget deficits have a positive effect on the rate of capacity utilization. Second, the tax rate for wage income does not affect the rate of capacity utilization, whereas the tax rate for capital income has a favorable impact on it. This result implies that raising the tax rate for capital income can be an important policy instrument for stimulating the economy. Third, we find that the economy exhibits a wage-led aggregate demand in the short run. The main long-run results are as follows. First, the effect of expanded budget deficits on the growth rate is ambiguous, since a higher debt burden negatively influences the rate of capacity utilization and hence economic growth, despite the increase in demand caused by government borrowing. A higher budget deficit ratio thus raises the growth rate only if a certain condition is satisfied. Second, the tax rate for capital income has a positive impact on the growth rate. Third, the economy shows a wage-led growth in the long run.     

Government debt,national income and causality

The concept of Granger causality is applied to assess the validity of the Ricardian Equivalence Hypothesis. The analysis is conducted using a multivariate approach with a US data set consisting of annual observations for the 1919–1981 period. The empirical evidence generated by this investigation does not support the strict debt neutrality position.     

Performance budgeting: effects on government debt and economic growth

This article examines the effects of performance budgeting on government debt and economic growth rates. The results show that countries with a higher share of ministries using performance targets in budget negotiation tend to have lower government debt and higher GDP growth rates. A simple fixed-effect model shows similar results. The evidence suggests that these results hold only in those countries with relatively lower corruption.     

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.     

Reelection,growth and public debt

In this work we examine how economic growth affects public debt when interacted with reelection prospects. Reelection considerations shorten political time horizons and give rise to political myopia that exacerbates debt accumulation. That laxer institutional reelection restrictions (e.g., no term limits) mitigate this effect due to electoral accountability is well known. Incorporating growth, we find that this mitigation can be reversed because less myopic, and more accountable, incumbents put more emphasis on smoothing the effects of growth across generations. We test these predictions using an annual-based panel of U.S. states over the period 1963–2010. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in reelection prospects, and aggregate national TFP shocks that are exogenous to individual states. Our estimates indicate that when reelection is possible a one standard deviation positive income shock induces, within the same year, a relative increase of approximately $40 in real per capita public debt.     

An empirical characterization of the effects of public debt on economic growth

Based on a data set of 115 economies, this article empirically investigates the relation between public debt and economic growth. Using the World Bank’s classification for income groups, we initially find that those countries that present the lowest public debt are characterized by the highest economic growth, while the smallest growth rates are associated with the highest public debt. Nevertheless, this conclusion is tempered when we analyse the countries by income level: low-income countries have a different behaviour with respect to lower-middle, upper-middle and high-income countries. When using the IMF’s country classification, the results do not suggest a clear pattern in the public debt–economic growth nexus across different countries, but indicate a heterogeneous relationship between such key macroeconomic variables.     

Endogenous longevity,public debt and endogenous growth

This study explores the mechanism that causes an inverted U-shaped relationship between the public debt to GDP ratio and the economic growth rate which is observed in empirical studies. We show that this relationship is caused even when the government does not introduce the golden rule of public finance, and government health care expenditure has important role in generating this relationship.     

Public capital,sustainable debt and endogenous growth

We analyze an endogenous growth model with public capital and public debt where we posit that the primary surplus of the government is a positive function of cumulated past debt with an exponentially declining weight put on debt further back in time. We consider two scenarios: first, we study the model assuming that the government runs a balanced budget and, then, we compare the outcome to that of the model with permanent deficits. We analyze growth effects of the two scenarios and we study how fiscal policy of the government affects the dynamics of the model economy. It is demonstrated that the balanced growth rate is higher when cumulated past public debt is smaller. Further, we show that the debt policy of the government crucially determines the dynamics of the model economy and that endogenous growth cycles can arise.     

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.     

Heterogeneous capital, economic growth, and economic development

This paper asks how much does physical capital contribute to economic growth. It postulates that capital is heterogeneous because of embodied progress, and it structures the inquiry to account for differences in economic development. Embedded in data that cover 120 nations over 41 years are 35 derived capital stock series, whose characteristics include average ages stratified by development state. Growth accountancy proceeds by regression analysis cast in a production function context and repeated for each capital type. Those results help to establish the growth contributions of labor quantity and quality and capital quantity and quality. They also bear on neoclassical convergence.     

Sovereign debt and the length of economic depressions

We analyze the duration of economic depressions to see if there is an association with consecutive years of high public-debt-to-GDP ratios. We find that there is a positive, non-linear association between the sovereign debt ratio and the length of depressions. Inflation is negatively and linearly correlated with depression duration. These associations are robust to the inclusion of controls for development, but we do detect cross-country heterogeneity in the probability of exit. An analysis of causality finds little evidence that high levels of sovereign debt cause depressions to be longer. Rather, it appears that longer depressions elicit higher debt relative to GDP. Public deleveraging during a depression is not likely, therefore, to help bring it to an end.     

Macrodynamics of debt regimes, financial instability and growth

This paper develops a post-Keynesian dynamic model of capacityutilisation and growth, in which the supply of credit-moneyis endogenous and firms' debt position—and thus the financialfragility of the economy à la Hyman Minsky—is explicitlymodelled. The interest rate is set by banks as a markup overa base rate exogenously determined by the monetary authority.The banking markup varies with changes in capacity utilisation,while the debt ratio varies with changes in the rates of interest,capital accumulation and growth. Regarding dynamics, it is shownthe possibility of relating the stability properties of a systemwith the interest rate and the debt ratio as state variablesto the prevailing Minskyan regime—hedge, speculative orPonzi.