Sustainable Debt Policy Rules and Growth in a Small Open Economy Model: Is a Balanced Government Budget Worthwhile?

Abstract

In this paper our objective is to analyze sustainable debt policy rules and economic growth using a model of endogenous economic growth theory. For the government it is possible to run into debt, but, the primary surpulus is a positive linear function of the debt-to-GDP ratio which guarantees that public debt is sustainable. We analyze different sustainable debt policies in this small open economy model of endogenous growth with public capital accumulation, as well we take transitions into account. We investigate the characteristics and stability of the steady state and we analyze the effects on welfare for the different debt policies.

Keywords: Public Dept, Fiscal Sustainability, Economic Growth, Small Open Economy Model

JEL Classification: E62; F43; H63