The neoclassical growth model is the workhorse of both growth theory and, in its stochastic version, real business cycle theory. It is shown that the equilibrium in a federation with publicly provided. The american economist robert solow, who won a noble prize in economics and the british economist, j. In the solow model, agents in the economy and the planner follow a simplistic linear rule for consumption and investment. Neoclassical theory of economic growth explained with. In fiscal policy in an endogenous growth model, saintpaul 1992 built on the growth model from blanchard 1985 and weil 1989 and analyzed the impact of scal policy on growth and found that, in an endogenous growth model, an increase in national debt reduces economic growth. Costly financial intermediation in neoclassical growth theory rajnish mehra, facundo piguillem, and edward c. A dynamic general equilibrium model satisfying golden rule in neoclassical growth theory. In this paper the interest rate effect of government deficit financing in neoclassical model with endogenous labour supply and knowledgebased growth is examined. Capital mobility in neoclassical models of growth robert j.
Samuelson 8 has examined the determination of interest rates in a single. American economic association national debt in a neoclassical growth model authors. The overlapping generations olg model is one of the dominating frameworks of analysis in the study of macroeconomic dynamics and economic growth. Aug 04, 2019 neoclassical economics is an approach to economics that relates supply and demand to an individuals rationality and his ability to maximize utility or profit.
This paper extends diamond 1965s onesector neoclassical growth model with twoperiod lived, overlapping generations, by allowing the agents to make the labor force participation decision in. For instance, criticism that neoclassical economics necessarily posits hyperrational bargainhunters, never able to resist an act which brings them the tiniest increase in expected net returns, is apt but not telling. Modigliani 4 has explored the effects of the existence of. The basic model is a standard neoclassical growth model into which we introduce distortionary taxation and government spending. Modern economists, who see public debt as a driver of economic growth if the funds are used for productive purposes, and conventional view under which public debt stimulates aggregate demand and growth in the short term and encourages the reduction of capital and national income in long term. Adverse selection in a neoclassical growth model costas azariadis university of pennsylvania bruce d. This paper theoretically studies how unfunded payasyougo social security affects economic growth, the fertility rate, and welfare in a neoclassical growth model. Pdf a neoclassical growth model with endogenous retirement. Neoclassical economics is an approach to economics that relates supply and demand to an individuals rationality and his ability to maximize utility or profit. Sato 2009 and projections of future population growth rates produced by the japanese government. Although the neoclassical growth model does not impose a maximum debt to output ratio, when compared with the experiences of other countries, it is perhaps surprising that. The ramseycasskoopmans model, or ramsey growth model, is a neoclassical model of economic growth based primarily on the work of frank p. The solow model believes that a sustained rise in capital investment increases the growth rate only temporarily. National debt in a neoclassical growth model created date.
It illumnated the properties of such models through two fundamental contributions. This view is in line with neoclassical model of economic growth. The neoclassical growth model for a closed economy fits these facts if capital is viewed broadly to encompass human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or preferences about saving lead to heterogeneity in steadystate positions. Economic fluctuations and growth the empirical evidence reveals conditional convergence in the sense that economies grow faster per capita if they start further below their steadystate positions. But now a days, there is a customary to present a full fledge classical model which is composed of the ideas given by smith, ricardo, j. Apr 21, 2019 neoclassical growth theory is an economic theory that outlines how a steady economic growth rate results from a combination of three driving forces. To maintain intertemporal government budget balance the transition probabilities are functions of the debt to gnp ratio. Introduction to modern economic growth, 2007, chapters 58.
Financial openness versus autarky in a neoclassical growth. Neoclassical growth model original contribution oframsey 1928. Taxes are proportional to total income, and they are redistributed as equal lumpsum transfers. The gitd report examines yearly growth and debt levels, with no allowance for an impact over time, or a more complicated dynamic relation between growth and debt. Classical model of economic growth features diagram. Government debt and economic growth economic policy institute. Identifiying the link between the foreign debt overhang and macroeconomic performance is essential for assessing what creditors and debtors have to gain from alternative debt solutions. We are not the first to investigate the crowdingout effect of public debt in neoclassical growth models. In his seminal paper, diamond 1965 deals with the effect of public debt in a lifecycle olg model. We show conditions for existence, uniqueness, and multiplicity of. Government expenditure, external and domestic public debt. We show conditions for existence, uniqueness, and multiplicity of the steady states. Public debt is composed of two components, domestic debt and external debt.
Most economists and specialists in international finance believe that the debt crisis hurts macroeconomic performance, particularly discouraging investment and growth oriented structural reforms. Most economists and specialists in international finance believe that the debt crisis hurts macroeconomic performance, particularly discouraging. National debt, savings, and real interest rates in a neoclassical model with endogenous labour supply and knowledgebased growth s h a w n n i university of missouricolumbia abstract. National debt, savings, and real interest rates in a. Indeed, there is a long history of this vein of the literature. Ramsey, with significant extensions by david cass and tjalling koopmans.
That is why some times it is known as the casskoopmans model. However, the marginal product of additional units of capital may decline there are diminishing returns and thus an economy moves back to a longterm growth path, with real gdp growing. When we introduce a benchmark paradigm, such as in the case of the neoclassical growth model, the presentation of the model and the derivation of the results will be quite detailed, with emphasis on both. Fiscal sustainability and public debt in an endogenous. How does the debt crisis affect investment and growth. Pdf the role of government debt in economic growth. Pdf american economic association national debt in a. As a preliminary, the meaning of the adjective neoclassical is discussed. This research will add to the literature on neoclassical growth by developing an augmented solow neoclassical growth model with human capita l and public debt. The basic model is then sketched, and the conditions ensuring a stationary state are illustrated.
Payasyougo social security and endogenous fertility in. The neoclassical growth model does not have a closedform solution. In contrast, to the ramseycasskoopmans neoclassical growth model in which individuals are infinitelylived, in the olg model individuals live a finite length of time, long enough to overlap with at least one period of another agents life. National debt in a neoclassical growth model by peter a. Readings economic growth economics mit opencourseware. Samuelson 8 has examined the determination of interest rates in a singlecommodity world without durable goods. This conclusion holds even if the output loss resulting from distortionary taxes is taken into account. A neoclassical growth model with constant saving rates, publicly provided services and public debt is used to analyse the impact of a federal structure.
The burden of public debt in neoclassical growth models. The neoclassical growth theory was developed in the late 1950s and 1960s of the twentieth century as a result of intensive research in the field of growth economics. That is why some times it is known as the ramsey model. Some were of the view that external debt accelerates economic growth hameed, ashraf and chandhary, 2008. The first observation is that whether the fertility rate increases or not by the expansion of the payasyougo. They had much more similarities in their models of growth. The literature is replete with empirical models that estimate the effect of external debt of developing countries on. In addition, this paper considers a more general form of childrearing cost, which is a mixture of time and money.
While we do find a difference in growth rates for years with debt ratios exceeding 90%, the average growth rate in these years in our sample is slightly different from the gitd findings. Robert solow used the neoclassical growth model as the basis for decomposing the growth in output per capita into portions accounted for by increased inputs and the portion attributable to. Impact of foreign debt on economic growth in zimbabwe. Financial openness versus autarky in a neoclassical growth model. I will develop the model in the next session, followed by a discussion on methodology and data. The paper surveys the neoclassical theory of growth. Adam smith and ricardo both were the classical economists. The main focus is on the existence and the stability of steady states. Government debt and economic growth economic policy. Since the great recession, the topic of financial debt has gained renewed attention.
Economic growth as measured by the annual gross domestic product gdp billions of us dollars is the dependent variable. Evctor rosrull we study a dynamic version of meltzer and richards medianvoter model of the size of government. Building on paul samuelsons seminal work concerning consumption loans between individuals of different generations, this paper pioneered the analysis of overlapping generations olg models with durable capital goods. Understanding the solow economic growth model tutor2u. In our model, any debt to output ratio is sustainable in steady state as long as it is possible to raise. The neoclassical theory of growth and distribution solow. The independent variables are external debt as a percentage of gross national income, gni, labour force growth population size in millions. Neoclassical growth theory is an economic theory that outlines how a steady economic growth rate results from a combination of three driving forces.
The effect of external debt on a nations economy has been a subject of controversy among academics. The results will be analyzed, followed by a brief conclusion. If this is the first time you use this feature, you will be asked to authorise cambridge core to connect with your account. Our main policy contribution is that according to the neoclassical growth models, the longrun burden of public debt around the current 90 percent average debtto. We study the effect of public debt on economic growth for annual and 5year average growth rates, as well as the existence of nonlinearity effects of debt on growth for 14 european countries from 1970 until 2012. Ricardos fame was established as a critic of the growth of national debt and through his proposal for a tax on wealth a capital levy to rapidly reduce. In his growing neo classical economy with overlapping generations, he shows that individuals living in the. Special problems arising in the study of economics with infinitely many commodities. Diamond 1 examines the effects of a constant amount of national debt per head on the utility of a citizen. In this section, we start the analysis of the neoclassical growth model by considering. There is no compelling theoretical reason why the stock of debt at a given point in time should harm contemporaneous economic growth. National debt in a neoclassical growth model american. E2,e44,e6,g1,g11,g12,g23 abstract the neoclassical growth model is extended to include costly intermediated borrowing and lending between households. Fiscal sustainability and public debt in an endogenous growth.
This paper analyzes the relationship between government expenditure, tax on returns to assets, public debt, and growth in an endogenous growth model. We analyse the relation between growth and the current. In the ramsey model, agents and the planner choose consumption and investment optimally so as to maximize their utility welfare. The ramseycasskoopmans model differs from the solowswan model in that the choice of consumption is explicitly microfounded at a point in time and so endogenizes the. Thus, as long as critics slings and arrows are directed against features of neoclassical economics that the latter can shed strategically, like a threatened lizard loses its tail, they shall miss their target. We also consider debttogdp ratio interactions with monetary, public finance, institutional and macroeconomic variables. Smith cornell university july 1991 we have benefitted from comments on earlier versions of this paper by seminar participants at duke, iowa, the university of western ontario, ucla, usc, stanford, berkeley, nyu, johns hopkins. Having set up a neoclassical growth model to study the impact of the debt crisis on investment and growth, the author concludes. Yet its use in international economics has been relatively limited, due to the assumption of the standard neoclassical growth model that investment is determined by domestic savings. Financial openness versus autarky in a neoclassical growth model george alogoskou. Diamond this paper contains a model designed to serve two purposes, to examine longrun competitive equilibrium in a growth model and then to explore the effects on this equilibrium of government debt. Completed bydavid cass 1965andtjalling koopmans 1965. Available formats pdf please select a format to send.
603 1363 3 822 295 1173 219 289 683 442 1523 558 67 209 439 1248 1665 589 304 1355 152 1108 173 1469 1322 1153 930 162 482 639 131 578 1189 1098 83