By Michael Bräuninger
This publication considers public debt dynamics in quite a few endogenous progress versions, specifically the AK version and particular versions of innovation and human capital accumulation. additionally, the closed economic climate, the small open economic system and a two-country global are analysed. within the closed economic climate version, the focal point is on funds deficit and public debt dynamics and their impression on capital development and output development. Then, within the open economic system version, the results on overseas debt development are thought of. In a two-country atmosphere, public debt progress in a single kingdom impacts development within the different nation. In each one situation the govt. both fixes the deficit ratio or the tax cost. For either recommendations the regular country is derived and balance is analysed. Then, dynamics prompted by means of a variety of shocks and coverage measures are explored. Many diagrams illustrate the dynamics.
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Extra info for Public Debt and Endogenous Growth
In the following we posit that the government estimates the marginal product of capital as BA, where a :S B :S 1. We will then treat B = 1 and B = a as special cases. Summarizing the above, the model can be captured by a system of seven equations: Y=AK (3) r=aA (4) K=Y-C (5) C=(BA-p)C (6) C=(l-s)(l+b)Y (7) D=bY (8) bY + t(Y + rD) gY = + rD (9) Here a,B,p,g,s,A,C,D, and K are exogenous, where b,r,t,C,D,K, and Y are endogenous. In the following we analyse growth rates. To start with, let us consider consumption growth.
Given the amount of capital, output and income both increase. Therefore savings go up as well. Due to higher growth prospects, the government reduces the deficit ratio. 28, the k line moves upwards and the iJ line goes to the left. Capital and output growth increase immediately to the new steady-state level. In contrast, debt growth first declines and then intensifies gradually till it reaches the new steady-state level. As a consequence, the debtcapital ratio declines. In the new steady state, debt and capital grow at the same constant rate.
Debt growth always exceeds capital growth, so the debt-capital ratio grows. As a consequence, debt growth remains positive, while capital growth deteriorates become negative at some point of time, and deteriorate further. Capital declines to zero in finite time. Hence the economy will collapse. Summarizing we obtain: Proposition 2. If the conditions on the saving ratio and the primary deficit ratio are met, then one of the steady states is stable. In the normal case, there is no steady state, and the economy collapses.
Public Debt and Endogenous Growth by Michael Bräuninger