Political Economy of Debt and Growth / Marco Battaglini, Levon Barseghyan.

Format:

Book

Author/Creator:

Battaglini, Marco.

Contributor:

National Bureau of Economic Research.

Barseghyan, Levon.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21660.

NBER working paper series no. w21660

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

We present a theory of endogenous fiscal policy and growth. Fiscal policy -- debt, income tax, spending on local public goods and public investment -- is determined through legislative bargaining. Economic growth depends directly on public investment, private investment in human capital and, via learning-by-doing, labor supply. The model predicts that the economy converges to a balanced growth path in which consumption, private investment, public investment, public goods provision, public debt and productivity grow at the same constant rate. The transition to the balanced growth path is characterized by what we call the shrinking government effect: public debt grows faster than GDP, provisions of public goods and infrastructure grow slower than GDP and the tax rate declines. We use the model to study the impact of austerity programs which impose a ceiling on the amount of public debt a country can issue.

Notes:

Print version record

October 2015.