Working Paper: CEPR ID: DP496
Authors: George S. Alogoskoufls; Frederick Van der Ploeg
Abstract: This paper investigates the implications of budgetary policies for consumption and economic growth. We present a model that combines the Arrow-Romer endogenous growth model with the Blanchard-Yaari overlapping-generations model. We show that a rise in government debt, financed by lump-sum taxes, increases the share of private consumption to national income and reduces the long-run growth rate. We also show that a rise in government consumption financed by lump-sum taxes reduces both the share of private consumption in national income and the long-run growth rate. These results do not follow in infinite-horizon, representative-household models of endogenous growth. In such models the substitution of debt for tax finance does not affect consumption and the growth rate, and a balanced budget increase in government consumption crowds out private consumption one-for-one, without any effects on the growth rate. The paper examines the dynamic adjustment of consumption, growth and government debt to a temporary tax cut, and briefly discusses the empirical implications of the results.
Keywords: budgetary policy; burden of debt; consumption; endogenous growth
JEL Codes: 020; 111; 320
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government Debt (H63) | Share of Private Consumption to National Income (E20) |
| Government Debt (H63) | Long-Run Growth Rate (O49) |
| Government Consumption (H59) | Share of Private Consumption to National Income (E20) |
| Government Consumption (H59) | Long-Run Growth Rate (O49) |
| Temporary Tax Cut (H29) | Share of Private Consumption to National Income (E20) |
| Temporary Tax Cut (H29) | Long-Run Growth Rate (O49) |