Wealth Effects And Public Debt In An Endogenous Growth Model

The debate on public finances' sustainability has long focused on the conditions for the accumulation of debt. This implied that, empirically, the analyses revolved around estimations of dynamic versions of the debt accumulation equation, through unit root tests and co-integration tests between e.g. revenues and primary expenditures, or debt and deficit. Bohn [2007, Journal of Monetary Economics], has forcefully argued in favour of a stronger focus on theory. The model of this paper shows to which extent and under which conditions earlier results considering fiscal policy in an endogenous growth setting are modified if government spending is not entirely tax-financed.