The Transitional Dynamics of Debt: Productivity Shocks, Fiscal Policy and Economic Growth
DOI:
https://doi.org/10.61841/e6wq0091Keywords:
economic growth, endogenous growth, debt, covid-19, optimal taxation, simulationsAbstract
We propose a two-sector endogenous growth model with both public and private production. The government sector produces an output that enters both the utility function and the production function, financed by both taxes and borrowing, such that public expenditure and public finance are independently determined. We impose a homogeneous stylized labour productivity supply shock to country specific simulations, coinciding with hypothetical year 2020, and consider their respective heterogeneous fiscal responses. The simulations depict the transitional dynamics in both developed and less developed economies to the simultaneous labour and policy shocks.
Using advanced software applications, explicitly suited to model continuous time mathematics, we simulate closed form solutions to continuous time general equilibria that are defined by a three-dimensional modified golden rule across consumption, capital and debt. The model represents a baseline for analysis of the short to medium term impacts of shocks, both exogenous or policy induced, within a richly defined dynamic general equilibrium. Our methodology extends the ability to analyze transitional dynamics in multidimensional models where hitherto analysis has been confined to the long run equilibria.
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