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Growth and Public Debt: What Are the Relevant Trade‐Offs?

Abstract : The interplay between growth and public debt is addressed considering a Barro-type (1990) endogenous growth model where public spendings are financed through taxes on income and public debt. The government has a target level of public debt relative to GDP, and the long-run debt-to-GDP ratio is used as a policy parameter. We show that when debt is a large enough proportion of GDP, two distinct balanced-growth paths (BGPs) may coexist, one being indeterminate. We exhibit two types of important trade-offs associated with self-fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the debt-to-GDP ratio while the highest one is increasing. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, local and global indeterminacy may arise and self-fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth, welfare, and macroeconomic fluctuations. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.
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Contributor : Elisabeth Lhuillier Connect in order to contact the contributor
Submitted on : Monday, April 1, 2019 - 5:41:16 PM
Last modification on : Wednesday, July 13, 2022 - 10:41:44 AM

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Arnaud Cheron, Kazuo Nishimura, Carine Nourry, Thomas Seegmuller, Alain Venditti. Growth and Public Debt: What Are the Relevant Trade‐Offs?. Journal of Money, Credit and Banking, Wiley, 2019, 51 (2-3), pp.655-682. ⟨10.1111/jmcb.12543⟩. ⟨hal-02087092⟩



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