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Vortragende Person/Vortragende Personen:
Martin Wolf (University of St. Gallen)

Growing out of the public debt

Abstract: I study public debt sustainability in an economy with endogenous productivity growth. The growth rate depends on the level of taxes, which in turn depends on the level of debt. Through households' saving behavior, moreover, the interest rate on public debt depends on the level of growth. Through this nexus, the level of public debt endogenously determines the "cost of debt" r - g. I derive conditions under which r - g adjusts by enough in response to shocks to stabilize the debt ratio even absent a strong response of taxes, a situation of "growing out of the public debt". The model also predicts the possibility of multiple steady states: the economy can remain stuck forever in a high debt - low growth - low interest rate equilibrium.

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