Hostname: page-component-848d4c4894-5nwft Total loading time: 0 Render date: 2024-05-08T15:12:12.394Z Has data issue: false hasContentIssue false
  • English
  • Français

THE SIMPLE DYNAMICS OF PUBLIC DEBT WITH PRODUCTIVE PUBLIC GOODS

Published online by Cambridge University Press:  06 June 2016

Pierre-Richard Agénor  and
Devrim Yilmaz
Pierre-Richard Agénor
Affiliation:
University of Manchester and Centre for Growth and Business Research
Devrim Yilmaz*
Affiliation:
Kingston University
*
Address correspondence to: Sakir Devrim Yilmaz, Kingston University, Penrhyn Road Campus, Holmwood House, HH1011, Kingston-upon-Thames, London KT1 5EE, UK; e-mail: s.yilmaz@kingston.ac.uk.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes the dynamics of public debt in a simple two-period overlapping-generations model of endogenous growth with productive public goods. Alternative fiscal rules are defined, with particular attention devoted to the golden rule. Conditions under which multiple equilibria may emerge are characterized. The analysis is then extended to consider the case of partial depreciation, an endogenous risk premium, an endogenous primary surplus rule, a generalized golden rule, a nonseparable utility function, and network externalities. If network effects are sufficiently strong, an increase in public investment may shift the economy from a low-growth equilibrium to a steady state characterized by both higher public debt ratios and higher output growth. This shift may enhance welfare as well. These results illustrate the importance of preserving, even in a context of fiscal retrenchment, the allocation of resources to specific types of public investment.

Keywords

Public InfrastructureFiscal RulesGrowth
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 4 , June 2017 , pp. 1059 - 1095
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are grateful to seminar participants at the University of York, the University of Manchester, and the Australian National University, as well as two anonymous referees and the Associate Editor, for many helpful comments on a previous draft.

References

REFERENCES

Agénor, Pierre-Richard (2010) A theory of infrastructure-led development. Journal of Economic Dynamics and Control 34, 932–950.Google Scholar
Agénor, Pierre-Richard (2012) Public Capital, Growth and Welfare. Princeton, NJ: Princeton University Press.Google Scholar
Agénor, Pierre-Richard and Neanidis, Kyriakos (2015) Innovation, public capital, and growth. Journal of Macroeconomics 44, 252–275.Google Scholar
Agénor, Pierre-Richard and Yilmaz, Devrim (2011) The tyranny of rules: Fiscal discipline, productive spending, and growth in a perfect foresight model. Journal of Economic Policy Reform. 14, 69–99.Google Scholar
Annichiarico, Barbara and Giammarioli, Nicola (April 2008) Fiscal Rules and Sustainability of Public Finances in an Endogenous Growth Model. Unpublished, European Central Bank.Google Scholar
Arai, Real (2011) Productive government expenditure and fiscal sustainability. FinanzArchiv 67, 327–351.CrossRefGoogle Scholar
Barro, Robert J. (1990) Government spending in a simple model of endogenous growth. Journal of Political Economy 98, s103–s25.Google Scholar
Bi, Huikin (2012) Sovereign default risk premia, fiscal limits, and fiscal policy. European Economic Review 56, 389–410.Google Scholar
Bohn, Henning (1998) The behavior of U.S. public debt and deficits. Quarterly Journal of Economics 113, 949–963.Google Scholar
Bom, Pedro R. and Ligthart, Jenny E. (2014) What have we learned from three decades of research on the productivity of public capital? Journal of Economic Surveys 28, 889–916.CrossRefGoogle Scholar
Brauninger, Michael (2005) The budget deficit, public debt, and endogenous growth. Journal of Public Economic Theory 7, 827–840.Google Scholar
Buiter, Willem H. (January 2004) Fiscal Sustainability. Unpublished, European Bank for Reconstruction and Development.Google Scholar
Candelon, Bertrand, Colletaz, Gilbert, and Hurlin, Christophe (2013) Network effects and infrastructure productivity in developing countries. Oxford Bulletin of Economics and Statistics 75, 887–913.Google Scholar
Chalk, Nigel A. (2000) The sustainability of bond-financed deficits: An overlapping generations approach. Journal of Monetary Economics 45, 293–328.Google Scholar
Collignon, Stefan (2012) Fiscal policy rules and the sustainability of public debt in Europe. International Economic Review 53, 539–567.Google Scholar
Czernich, Nina, Falck, Oliver, Kretschmer, Tobias, and Woessmann, Ludger (2011) Broadband infrastructure and economic growth,. Economic Journal 121, 505–532.Google Scholar
De la Croix, David and Michel, Philippe (2002) A Theory of Economic Growth: Dynamics and Policy in Overlapping Generations. Cambridge, UK: Cambridge University Press.Google Scholar
Égert, Balázs, Kozluk, Tomasz, and Sutherland, Douglas (March 2009) Infrastructure and Growth: Empirical Evidence. Working paper 26, OECD Economics Department.Google Scholar
European Commission (December 2014) Infrastructure in the EU: Developments and Impact on Growth. Occasional paper 203, European Economy Series.Google Scholar
Fernández-Huertas, Moraga and Vidal, Jean-Pierre (2010) Fiscal sustainability and public debt in an endogenous growth model. Journal of Pension Economics and Finance 9, 277–302.Google Scholar
Futagami, Koichi, Iwaisako, Tatsuro, and Ohdoi, Ryoji (2008) Debt policy rule, productive government spending, and multiple growth paths. Macro-economic Dynamics 12, 445–462.Google Scholar
Futagami, Koichi and Shibata, Akihisa (2003) Budget deficits and economic growth. Public Finance 53, 331–354.Google Scholar
Ghosh, Sugata and Mourmouras, Iannis A. (2004) Endogenous growth, welfare and budgetary regimes. Journal of Macroeconomics 26, 623–635.Google Scholar
Ghosh, Sugata and Nolan, Charles (2007) The impact of simple fiscal rules in growth models with public goods and congestion. Manchester School 75, 634–651.CrossRefGoogle Scholar
Greiner, Alfred (2007) An endogenous growth model with public capital and sustainable government debt. Japanese Economic Review 58, 345–361.Google Scholar
Greiner, Alfred (2011) Economic growth, public debt and welfare: Comparing three budgetary rules. German Economic Review 12, 205–222.Google Scholar
Greiner, Alfred (2012) Public capital, sustainable debt and endogenous growth. Research in Economics 66, 230–238.Google Scholar
Greiner, Alfred and Flaschel, Peter (2010) Public debt and public investment in an endogenous growth model with real wage rigidities. Scottish Journal of Political Economy 57, 68–84.Google Scholar
Greiner, Alfred and Semmler, Willi (2000) Endogenous growth, government debt, and budgetary regimes. Journal of Macroeconomics 22, 363–384.Google Scholar
Inderst, Georg (June 2013) Private Infrastructure Finance and Investment in Europe. Working paper 2013/02, European Investment Bank.Google Scholar
International Monetary Fund (2014) Back To Work: How Fiscal Policy Can Help. Washington, DC: Fiscal Monitor.Google Scholar
Lancia, Francesco and Russo, Alessia (2013) A Dynamic Politico-Economic Model of Intergenerational Contracts. Department of Economics paper 1304, University of Vienna.Google Scholar
Michel, Philippe, von Thadden, Leopold, and Vidal, Jean-Pierre (2010) Debt stabilizing fiscal rules. Journal of Public Economic Theory 12, 923–941.Google Scholar
Minea, Alexandru, and Villieu, Patrick (2012) Persistent deficit, growth, and indeterminacy. Macro-economic Dynamics 16, 267–283.Google Scholar
Roberts, Mark and Deichmann, Uwe (2011) International growth spillovers, geography and infrastructure. World Economy 34, 1507–1533.Google Scholar
Rogers, Everett M. (2003) Diffusion of Innovations, 5th ed. New York: Free Press.Google Scholar
Röller, Lars-Hendrik and Waverman, Leonard (2001) Telecommunications infrastructure and economic development: A simultaneous approach. American Economic Review 91, 909–923.Google Scholar
Song, Zheng, Storesletten, Kjetil, and Zilibotti, Fabrizio (2012) Rotten parents and disciplined children: A politico-economic theory of public expenditure and debt. Econometrica 80, 2785–2803.Google Scholar
Teles, Vladimir K. and Mussolini, Caio C. (2014) Public debt and the limits of fiscal policy to increase economic growth. European Economic Review 66, 1–15.Google Scholar
Turnovsky, Stephen J. (1997) Fiscal policy in a growing economy with public capital. Macroeconomic Dynamics 1, 615–639.Google Scholar
Turnovsky, Stephen J. (2004) The transitional dynamics of fiscal policy: Long-run capital accumulation and growth. Journal of Money, Credit and Banking 36, 883–910.Google Scholar
Yakita, Akira (2008) Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting. Journal of Public Economics 92, 879–914.Google Scholar