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PERSISTENT DEFICIT, GROWTH, AND INDETERMINACY

Published online by Cambridge University Press:  20 April 2012

Alexandru Minea  and
Patrick Villieu
Alexandru Minea*
Affiliation:
CERDI, University of Auvergne
Patrick Villieu
Affiliation:
LEO, University of Orléans
*
Address correspondence to: Alexandru Minea, CERDI (University of Auvergne), 65 Boulevard François Mitterrand, B.P. 320, 63009 Clermont-Ferrand Cedex 1, France; e-mail: alexandru.minea@u-clermont1.fr.
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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.

Keywords

DeficitProductive Government SpendingEndogenous GrowthNonlinear Effects of Fiscal PolicyPublic Debt
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Supplement S2: Time-Varying Modeling with Macroeconomic and Financial Data , September 2012 , pp. 267 - 283
Copyright
Copyright © Cambridge University Press 2012

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