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DYNAMIC ANALYSIS OF REDUCTIONS IN PUBLIC DEBT IN AN ENDOGENOUS GROWTH MODEL WITH PUBLIC CAPITAL

Published online by Cambridge University Press:  09 September 2016

Noritaka Maebayashi ,
Takeo Hori  and
Koichi Futagami
Noritaka Maebayashi*
Affiliation:
University of Kitakyushu
Takeo Hori
Affiliation:
Aoyama Gakuin University
Koichi Futagami
Affiliation:
Osaka University
*
Address correspondence to: Noritaka Maebayashi, Faculty of Economics and Business Administration, the University of Kitakyushu, 4-2-1 Kitagata, Kokura Minami-ku, Kitakyushu 802-8577, Japan; e-mail: [email protected].
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Abstract

We construct an endogenous growth model that includes productive public capital and government debt. We assume that the government debt-to-GDP ratio is gradually adjusted to a target level, reflecting the permanent commitment rules in the Stability and Growth Pact or the Maastricht Treaty in the European Union (i.e., the well-known 60% rule). These rules affect government borrowing and public investment. Here, we examine the welfare implications of the permanent commitment rules. We find that fiscal consolidation based on the rules improves social welfare. Moreover, the improvement in welfare accelerates as fiscal consolidation progresses more rapidly. Last, we also discuss and derive the optimal long-run debt-to-GDP ratio.

Keywords

Fiscal ConsolidationDebt Policy RuleEndogenous Growth Model with Public CapitalWelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 6 , September 2017 , pp. 1454 - 1483
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

The authors would like to express their sincere gratitude to the editor, the associate editor, and two anonymous referees for their helpful comments and suggestions. They also gratefully acknowledge Chatan Ghate, Kazuki Hiraga, Shinsuke Ikeda, Kazuo Mino, Atsue Mizushima, Keiichi Morimoto, Akihisa Shibata, Akira Yakita, and seminar participants at Kyoto University, Meisei University, Osaka University, Otaru University of Commerce, the Development Bank of Japan, the Association for Public Economic Theory's 13th Annual Conference, the 11th Journées Louis-André Gérard-Varet Conference in public economics at the Faculté de Sciences Économiques et de Gestion, and the 68th Annual Conference of the International Institute of Public Finance. We are responsible for any remaining errors. Takeo Hori is currently at the Tokyo Institute of Technology, Japan.

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