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PUBLIC DEBT AND PUBLIC INVESTMENT IN AN ENDOGENOUS GROWTH MODEL WITH REAL WAGE RIGIDITIES
Author(s) -
Greiner Alfred,
Flaschel Peter
Publication year - 2010
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2009.00507.x
Subject(s) - economics , endogenous growth theory , debt , wage , unemployment , monetary economics , investment (military) , deficit spending , public capital , fiscal policy , real gross domestic product , real interest rate , public investment , macroeconomics , labour economics , interest rate , human capital , market economy , politics , political science , law
We present an endogenous growth model with public capital, public debt and real wage rigidities due to labor market imperfections. Assuming that the primary surplus relative to gross domestic produce (GDP) is a positive function of the debt to GDP ratio, we study growth and employment effects of deficit‐financed public investment using simulations as well as how fiscal policy affects stability of the economy. Further, we contrast the growth rate and the unemployment rate in the deficit scenario with that of the balanced budget scenario. Finally, we compare our results with those obtained in case of flexible wages and full employment.