Human capital formation and public debt : growth and welfare effects of three different deficit policies / Alfred Greiner
VerfasserGreiner, Alfred
ErschienenBielefeld, Germany : Universität Bielefeld, Faculty of Business Administration and Economics, May 2015
Elektronische Ressource
Umfang1 Online-Ressource (23 Seiten)
SerieWorking papers in economics and management ; No. 05-2015
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Human capital formation and public debt [0.2 mb]

In this paper we analyze an endogenous growth model with human capital that results from public educational spending. We allow for public debt and analyze three different debt policies: a balanced government budget, a slight deficit policy where debt grows but less than GDP, and a strong deficit policy where debt grows at the same rate as GDP. We find that the balanced budget policy and the policy with a slightly growing public debt are equivalent as concerns long-run economic growth. Further, those two rules yield higher growth than a debt policy where public debt grows at the same rate as GDP, unless the government is a creditor. As concerns welfare, it can be demonstrated that a strong deficit policy yields lower welfare than a balanced budget and a slight deficit, unless initial debt ratios are low and the intertemporal elasticity of substituion is high. Finally, it is demonstrated that there may exist an inverted U-shaped relation between welfare and deficit financed educational spending.

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