Arbeitspapier
Public Debt and Total Factor Productivity
This paper explores the role of public debt and fiscal deficits on factor productivity in an economy with credit market frictions and heterogeneous firms. When credit market conditions are sufficiently weak, low interest rates permit the government to run Ponzi schemes so that permanent primary deficits can be sustained. For small enough deficit ratios, the model has two steady states of which one is an unstable bubble and the other one is stable. The stable equilibrium features higher levels of credit and capital, but also a lower interest rate, lower total factor productivity and output. The model is calibrated to the US economy to derive the maximum sustainable deficit ratio and to examine the dynamic responses to changes in debt policy. A reduction of the primary deficit triggers an expansion of credit and capital, but it also leads to a deterioration of total factor productivity since more low-productivity firms prefer to remain active at the lower equilibrium interest rate.
- Language
-
Englisch
- Bibliographic citation
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Series: CESifo Working Paper ; No. 5125
- Classification
-
Wirtschaft
Fiscal Policy
National Deficit; Surplus
- Subject
-
credit constraints
unbacked public debt
dynamic inefficiency
sustainable deficits
- Event
-
Geistige Schöpfung
- (who)
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Kaas, Leo
- Event
-
Veröffentlichung
- (who)
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Center for Economic Studies and ifo Institute (CESifo)
- (where)
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Munich
- (when)
-
2014
- Handle
- Last update
-
20.09.2024, 8:25 AM CEST
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Kaas, Leo
- Center for Economic Studies and ifo Institute (CESifo)
Time of origin
- 2014
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