Debt Rule and Endogenous Growth in a Small Open Economy
Date Issued
2010
Date
2010
Author(s)
Chang, Wei-Ting
Abstract
Based on Turnovsky (1996), this paper constructs an open-economy endogenous growth model featuring productive public capital and public debt, and uses it to analyze the growth and welfare effects under two different debt rule regimes. Several findings emerge from the analysis. First, the golden rule of public finance that a government cannot borrow to finance non-productive expenditures is beneficial for public capital accumulation and economic growth.
Second, under the regime of the golden rule of public finance, a higher extent of debt-financed public investment is associated with a higher balanced growth rate. Third, under the regime of the fixed deficit rule, a rise in the deficit-income ratio is impotent in affecting public capital accumulation and the balanced growth rate. Fourth, with plausible values of initial consumption and other parameters, the welfare level under the regime of the golden rule of public finance is higher than that under the regime of the fixed deficit rule. Fifth, both economic growth and the welfare level would be boosted if non-productive government expenditures are financed with tax revenues and public investment is financed through public debt.
Subjects
Debt rule
Endogenous growth
Small open economy
SDGs
Type
thesis
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