Persistent Deficit, Growth, and Indeterminacy

Abstract

In this paper, we look for long-run and short-run effects of fiscal deficits on economic growth in an endogenous growth model with productive public spending that may be financed by public deficit and debt. The model shows a multiplicity of long-run balanced growth paths (a high-growth and a low-growth steady state) and a possible indeterminacy of the transition path, which may be consistent with the empirical literature, which exhibits strong nonlinear responses of economic growth to fiscal deficits. Starting from the high-growth steady state, a positive impulse in the deficit ratio exerts an adverse effect on economic growth in the long run, after an initial rise. Starting from the low-growth steady state, the situation may be radically undetermined, and the effect of fiscal deficit impulses is subjected to “optimistic” or “pessimistic” views on public-debt sustainability.

Fiscal policy, debt constraint and expectations-driven volatility

“…Therefore, for σ > σ α H , 9 [IJ] α,σ crosses the line (AB) above B and does not cross anymore the segment [BC]. For σ < σ α H , we get the same configuration as in the case α F > α > α H .…”

“…In endogenous growth models, Futagami et al [3] and Minea and Villieu [9] similarly obtain a multiplicity of stationary growth paths. However, when a sustainability constraint on the ratio of debt over output is considered, this multiplicity depends on the specification of preferences (Minea and Villieu [10], Nishimura et al [12]).…”

“…If σ α F < σ < σ α H , the steady state is a saddle for ǫ < ǫ α F , a sink for ǫ α F < ǫ < ǫ α H and a source for ǫ > ǫ α H . 9 The critical value σ α H is such that [IJ]α,σ goes through point B.…”

“…ratio of debt over GDP, the existence of multiple equilibria crucially depends on the specification of preferences. In another contribution, Minea and Villieu [9] consider as Futagami et al [3] productive public spending and a constant tax rate but with a sustainability constraint based on a deficit-to-GDP target for the government. A form of global (but not local) indeterminacy is exhibited.…”

The Simple Dynamics of Public Debt With Productive Public Goods

“…In contrast, if  is low, the economy may end up at  000 , where growth is lower than at Point . (2012), and Minea and Villieu (2012), where that elasticity is set equal, in standard Barro (1990) fashion, to the labor elasticity of output. Put 24 If the economy is initially at  0 (the high-debt equilibrium), it cannot converge to a new equilibrium, given the movement of the transition curve in this experiment.…”