Long-run output loss caused by public debt

What is it about?

Neoclassical growth models are frequently used to gauge the potential effect of public debt on long-run income. However, the conventional methods used for calculating the burden of public debt do not provide a closed-form solution to the long-run output-debt relationship. Our stock approach fills this gap in neoclassical growth theory by establishing a direct link between steady-state output and debt that holds independent of whatever assumptions are made about household behavior.

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Why is it important?

Our results deliver two crucial implications. First, the enormous differences in private saving rates and population growth rates, observed across the world, lead to vast differences in the burden of public debt among countries. Second, the burden of debt in developed countries, characterized by a high saving rate and low population growth rate, is rather small even at a debt level of 90 percent. Therefore, paying down public debt in these countries does not seem to exert a serious impact on the evolution of long-run income, at least according to neoclassical growth models.

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