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Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectation-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.

Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectation-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.

Investments in human capital are individual and collective choices carrying significant external effects. Educated parents and friends accelerate our own human capital accumulation. Skilled colleagues at work increase our own productivity. Sharing experiences with cultured people is gratifying by itself. We introduce human capital externalities in a stylized model à la Uzawa (1965) and we find that growth can be no longer balanced and the equilibrium can be globally indeterminate. Labor supply goes to one and capital reaches an upper ceiling in a finite lapse of time above the initial critical value of labor supply ensuring the balanced growth path. Under a constant tax rate, the government should set a positive rate to speed up human capital accumulation during transition to the capital ceiling. ; info:eu-repo/semantics/acceptedVersion

The interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and public debt. Debt is assumed to be a fixed proportion of GDP which is used as a policy parameter by the government. We first show that when debt is a large enough proportion of GDP, two distinct BGPs may co-exist, one being indeterminate. Therefore, local and global indeterminacy may arise and self-fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth and on macroeconomic fluctuations. We then exhibit two types of important trade-off associated with self-fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the ratio of debt/GDP while the highest one is increasing. As a result, depending on the BGP selected by agents' expectations, the relationship between debt and growth is not always negative. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, depending on the expectations of agents, when debt is increasing, large fluctuations associated to self-fulfilling believes may occur and be associated at the same time with welfare losses if there is a coordination on the low steady-state. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.

The interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and public debt. Debt is assumed to be a fixed proportion of GDP which is used as a policy parameter by the government. We first show that when debt is a large enough proportion of GDP, two distinct BGPs may co-exist, one being indeterminate. Therefore, local and global indeterminacy may arise and self-fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth and on macroeconomic fluctuations. We then exhibit two types of important trade-off associated with self-fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the ratio of debt/GDP while the highest one is increasing. As a result, depending on the BGP selected by agents' expectations, the relationship between debt and growth is not always negative. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, depending on the expectations of agents, when debt is increasing, large fluctuations associated to self-fulfilling believes may occur and be associated at the same time with welfare losses if there is a coordination on the low steady-state. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.

The interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and public debt. Debt is assumed to be a fixed proportion of GDP which is used as a policy parameter by the government. We first show that when debt is a large enough proportion of GDP, two distinct BGPs may co-exist, one being indeterminate. Therefore, local and global indeterminacy may arise and self-fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth and on macroeconomic fluctuations. We then exhibit two types of important trade-off associated with self-fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the ratio of debt/GDP while the highest one is increasing. As a result, depending on the BGP selected by agents' expectations, the relationship between debt and growth is not always negative. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, depending on the expectations of agents, when debt is increasing, large fluctuations associated to self-fulfilling believes may occur and be associated at the same time with welfare losses if there is a coordination on the low steady-state. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.

The problem of efficient or optimal allocation of resources is a fundamental concern of economic analysis. This book provides surveys of significant results of the theory of optimal growth, as well as the techniques of dynamic optimization theory on which they are based. Armed with the results and methods of this theory, a researcher will be in an advantageous position to apply these versatile methods of analysis to new issues in the area of dynamic economics.