Fiscal Policy in an Endogenous Growth Model

In a neoclassical growth model, it is possible to make a case for public debt, because a balanced growth path may be dynamically inefficient. This paper shows that this possibility no longer holds in an endogenous growth model with constant external returns to capital. It is shown that an increase i...

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Bibliographic Details
Published in:The Quarterly journal of economics 1992-11, Vol.107 (4), p.1243-1259
Main Author: Saint-Paul, Gilles
Format: Article
Language:English
Subjects:
Deficit financing
Economic externalities
Economic growth models
Economic growth rate
Economic modeling
Economic models
Economic theory
Endogenous growth theory
Fiscal policy
Growth models
Interest rates
Investment return rates
Public debt
Return on capital
Studies
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Summary:In a neoclassical growth model, it is possible to make a case for public debt, because a balanced growth path may be dynamically inefficient. This paper shows that this possibility no longer holds in an endogenous growth model with constant external returns to capital. It is shown that an increase in public debt reduces the growth rate, so there always exists a future generation that will be harmed, and that a reduction in public debt, although it increases the growth rate, cannot be Pareto-improving: one current generation must be harmed.
ISSN:0033-5533
1531-4650
DOI:10.2307/2118387