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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: [email protected].
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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 

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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

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