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Government spending in a model where debt effects output gap

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  • Bell, Peter N

Abstract

In this paper I present a simple model of government spending where the level of government debt affects the output gap. The structure of the economy is specified such that the output gap has a structural part, which is a function of debt. Based on empirical research, the structural part is assigned a specific functional form. The government faces an optimization problem where they attempt to close the output gap. The optimal change in government debt is found by solving a nonlinear equation. Numerical results show that the optimal change in debt has nonlinear behaviour. The solution to the unconstrained problem is an alternating equilibrium, whereas the solution to the constrained problem is a non linear cycle around the government's upper bound of admissible debt.

Suggested Citation

  • Bell, Peter N, 2012. "Government spending in a model where debt effects output gap," MPRA Paper 38347, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:38347
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    2. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    4. Paul Krugman & Gauti B. Eggertsson, 2011. "Debt, Deleveraging and the Liquidity Trap," 2011 Meeting Papers 1166, Society for Economic Dynamics.
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    More about this item

    Keywords

    Debt; Macroeconomy; Fiscal; Government Spending; Output Gap; Nonlinear; Numerical Method;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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