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Public capital, deficit financing, and economic growth in a stochastic economy

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  • Tamai, Toshiki
Abstract
This paper examines the relationship among deficit-financing fiscal policy, risk and economic growth in a stochastic endogenous growth model with private and public capital. We show that there are positive balanced-growth rate and a debt-to-GDP ratio that depend on deep parameters such as the income tax rate and the standard deviation of the growth rate of private and public capital. Investment and fiscal shocks influence the mean and variance of the growth rate and the debt dependency rate through portfolio changes and capital accumulation. In particular, an increase in the risk of private investment destabilizes the economy and reduces the mean growth rate if the portfolio change is drastic, and this increase in risk increases the debt-to-GDP ratio. In contrast, an increase in the income tax rate stabilizes the economy, increases the mean growth rate, and has a positive or negative effect on the debt-to-GDP ratio according to the ratio of public to private capital if the income tax rate is sufficiently small.

Suggested Citation

  • Tamai, Toshiki, 2014. "Public capital, deficit financing, and economic growth in a stochastic economy," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 14-26.
    • Handle: RePEc:eee:jmacro:v:42:y:2014:i:c:p:14-26
    DOI: 10.1016/j.jmacro.2014.06.006
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    Cited by:

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    3. Atemnkeng, Johannes Tabi & Tingum, Ernest Ngeh & Senke, Ngeh Laura, 2024. "Deficit Financing and Economic Return to Public Expenditure in the CEMAC Member Countries," African Journal of Economic Review, African Journal of Economic Review, vol. 12(1), March.
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    More about this item

    Keywords

    Public capital; National debt; Stochastic growth;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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