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DEBT POLICY RULE, UTILITY-GENERATING GOVERNMENT SPENDING, AND INDETERMINACY OF THE TRANSITION PATH IN AN AK MODEL

  • Takeo Hori (a1) and Noritaka Maebayashi (a2)
Abstract

This study examines the effects of borrowing for public services that increase households' utility (i.e., utility-generating government services) in an AK endogenous growth model. We assume that the government has a target debt ratio. The European Union and the United Kingdom adopt such debt policy rules. We find that application of a debt policy rule into utility-generating government spending causes indeterminacy of the transition path. We point out that the level of the target debt ratio, the tax rate, and the household utility parameters are important determinants of indeterminacy when considering utility-generating government services.

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Corresponding author
Address correspondence to: Noritaka Maebayashi, Faculty of Economics and Business Administration, the University of Kitakyushu, 4-2-1 Kitagata, Kokura Minami-ku, Kitakyushu, Fukuoka 802-8577, Japan; e-mail: non818mn@kitakyu-u.ac.jp.
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We would like to thank the editor, the associate editor, and two anonymous referees for their helpful comments on the earlier version of this paper. We also gratefully acknowledge Koichi Futagami, Tarishi Matsuoka, Akihisa Shibata, Kozo Ueda, and seminar participants at Otaru University of Commerce and The University of Kitakyushu. This study was conducted while the first author was in Aoyamagakuin University. We are responsible for any remaining errors.

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References
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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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