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Economic Growth and Public Debt in the World Economy

In: Growth and International Trade

Author

Listed:
  • Karl Farmer

    (University of Graz)

  • Matthias Schelnast

    (University of Graz)

Abstract

This chapter is devoted to the exploration of the relationship between public debt and economic growth in an extended version of the basic OLG growth model described in Chaps. 2 and 3. First, the two-dimensional intertemporal equilibrium dynamics of the debt-to-capital ratio and the efficiency-weighted capital intensity are derived from agents’ FOCs and market-clearing conditions under the assumption of a constant-flow budget policy. Here, in contrast to the basic OLG growth model without public debt, we find multiple steady-state solutions exhibiting both saddle-path and asymptotic stability. Under asymptotic stability there is no unique relationship between public debt and capital accumulation. Starting from a high-debt, low-capital-intensity and dynamically efficient steady state with a primary budget surplus, the debt-to-GDP ratio can be reduced only by both raising the tax rate and the public expenditure ratio, and it is accompanied by a fall in private capital intensity.

Suggested Citation

  • Karl Farmer & Matthias Schelnast, 2013. "Economic Growth and Public Debt in the World Economy," Springer Texts in Business and Economics, in: Growth and International Trade, edition 127, chapter 4, pages 81-109, Springer.
    • Handle: RePEc:spr:sptchp:978-3-642-33669-0_4
    DOI: 10.1007/978-3-642-33669-0_4
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