TITLE:
An Inverted U-Shaped Relationship between Public Debt and Economic Growth under the Golden Rule of Public Finance
AUTHORS:
Mitsuru Ueshina, Tamotsu Nakamura
KEYWORDS:
Inverted U-Shape, Public Debt, Economic Growth, Golden Rule of Public Finance
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.6,
August
9,
2019
ABSTRACT: Empirical evidence shows an inverted U-shaped
relationship between public debt-to-GDP ratio and economic growth for many
advanced economies. Using a simple endogenous growth model with public debt
under the Golden Rule of Public Finance (GRPF), which allows the government to
issue bonds only to finance public investment, this paper explains the
relationship. Although Greiner [1] explains it in the similar model, he introduces a more restrictive
assumption than GRPF that the amount of public investment must be always equal
to that of newly issued bonds, i.e.,
public investment must be financed only by newly issued bonds. This paper shows
that the assumption is not needed. In other words, the inverted U-shaped
relationship emerges in a more realistic case when public investment is partly
financed by other sources than government bonds such as taxes.