Debt and Growth: Is There a Non-Monotonic Relation?

Greiner A (2012) Bielefeld Working Papers in Economics and Management, 04-2012.
Bielefeld: Bielefeld University, Department of Business Administration and Economics.

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Abstract
In this note we theoretically investigate the question of whether the relationship between public debt and economic growth is characterized by an inverse U-shaped functional form. Starting point of our analysis is the paper by Checherita-Westphal et al. (2012) who present an endogenous growth model with public capital and public debt that displays a hump-shaped relation between debt and economic growth. We highlight the mechanism that generates this outcome and we generalize their model by allowing for a more general debt policy. We demonstrate that this nonmonotonic relation only holds if public deficits are exogenously fixed and exactly equal to public investment at each point in time. With a more general debt policy, one realizes that smaller public deficits and lower public debt always lead to a higher balanced growth rate. Thus, starting from a situation where the public deficit equals public investment, governments can raise the long-run growth rate by reducing their deficits.
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Greiner A. Debt and Growth: Is There a Non-Monotonic Relation?. Bielefeld Working Papers in Economics and Management, 04-2012. Bielefeld: Bielefeld University, Department of Business Administration and Economics; 2012.
Greiner, A. (2012). Debt and Growth: Is There a Non-Monotonic Relation? (Bielefeld Working Papers in Economics and Management, 04-2012). Bielefeld: Bielefeld University, Department of Business Administration and Economics.
Greiner, A. (2012). Debt and Growth: Is There a Non-Monotonic Relation? Bielefeld Working Papers in Economics and Management, 04-2012, Bielefeld: Bielefeld University, Department of Business Administration and Economics.
Greiner, A., 2012. Debt and Growth: Is There a Non-Monotonic Relation?, Bielefeld Working Papers in Economics and Management, 04-2012, Bielefeld: Bielefeld University, Department of Business Administration and Economics.
A. Greiner, Debt and Growth: Is There a Non-Monotonic Relation?, Bielefeld Working Papers in Economics and Management, 04-2012, Bielefeld: Bielefeld University, Department of Business Administration and Economics, 2012.
Greiner, A.: Debt and Growth: Is There a Non-Monotonic Relation? Bielefeld Working Papers in Economics and Management, 04-2012. Bielefeld University, Department of Business Administration and Economics, Bielefeld (2012).
Greiner, Alfred. Debt and Growth: Is There a Non-Monotonic Relation?. Bielefeld: Bielefeld University, Department of Business Administration and Economics, 2012. Bielefeld Working Papers in Economics and Management, 04-2012.
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