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Public debt and economic growth: what do neoclassical growth models teach us?

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  • Ákos Dombi
  • István Dedák

Abstract

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.

Suggested Citation

  • Ákos Dombi & István Dedák, 2019. "Public debt and economic growth: what do neoclassical growth models teach us?," Applied Economics, Taylor & Francis Journals, vol. 51(29), pages 3104-3121, June.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:29:p:3104-3121
    DOI: 10.1080/00036846.2018.1508869
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    Cited by:

    1. Kunpeng Wang & Wenjun Wu & Awais Jabbar & Zinabu Wolde & Minghao Ou, 2021. "Dynamic Evolution and Spatial Convergence of the Virtual Cultivated Land Flow Intensity in China," IJERPH, MDPI, vol. 18(13), pages 1-17, July.
    2. Marios Psychalis & Panagiotis Gournas & Nagia Grigorakou & Petros Dimitrakopoulos & George Stivachtis, 2020. "Fiscal Policy, Growth and Competitiveness in EMU: Evidence from Portugal and Greece," International Journal of Economics and Financial Issues, Econjournals, vol. 10(4), pages 18-24.
    3. Kamiguchi, Akira & Tamai, Toshiki, 2023. "Public investment, national debt, and economic growth: The role of debt finance under dynamic inefficiency," Journal of Macroeconomics, Elsevier, vol. 77(C).
    4. Biswajit Maitra, 2021. "Relative role of external debt, FDI, and domestic investment in economic growth: evidence from Sri Lanka," International Journal of Economic Policy Studies, Springer, vol. 15(2), pages 329-347, September.
    5. Anselm Komla Abotsi, 2024. "Fiscal policy sustainability and public debt in Africa," SN Business & Economics, Springer, vol. 4(1), pages 1-18, January.
    6. Anselm K. Abotsi, 2023. "Factors influencing the ability to honour debt repayment obligations by Governments in Africa," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 876-885, January.

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