Innovation-led growth in a time of debt

Journal Article (Journal Article)

We study the effects of large reductions in government budget deficits (labeled “fiscal consolidations”) on firms’ entry, innovative investments, productivity and per capita output growth in a model of endogenous technological change. Due to the absence of lump-sum taxes, temporary budget deficits set government debt-output ratios on unsustainable paths. An equilibrium then requires the specification of a date at which the debt-output ratio is stabilized at a constant finite value. We discipline parameters using post-war observations for the U.S. economy. We find that fiscal consolidations produce persistent growth slowdowns, permanently lowering the path of per capita output relative to a benchmark economy in which the fiscal consolidation is achieved with lump-sum taxes. These output losses are sizable. In this sense, government debt is a burden on the economy. Tax-based consolidations produce output losses that are twice as large as those from spending-based consolidations.

Full Text

Duke Authors

Cited Authors

  • Ferraro, D; Peretto, PF

Published Date

  • January 1, 2020

Published In

Volume / Issue

  • 121 /

International Standard Serial Number (ISSN)

  • 0014-2921

Digital Object Identifier (DOI)

  • 10.1016/j.euroecorev.2019.103350

Citation Source

  • Scopus