Public Capital, Public Pension, and Growth

This paper constructs an endogenous growth model with overlapping generations, whose engine of economic growth is productive public capital. The government faces a trade-off in public policy between public investment and social security provision because of its budget constraint. Larger public investment accelerates economic growth. On the other hand, larger public investment reduces the social security provision. This may reduce the consumption stream of agents. We first show that when the government aims at growth maximization, it chooses no social security provision. However, we also show that the growth-maximizing policy does not maximize welfare levels of each generation on the balanced growth path. Early generations may demand social security provision because the benefits from economic growth caused by an acceleration of public investment are relatively small. In contrast, future generations may require no social security provision but a large amount of public capital. Additionally, by setting the tax rate below the level that maximizes the growth rate, the government can make the welfare levels of all generations from the initial state on the balanced growth path better off. Moreover, in an economy facing an aging population, an increase in the social security provision to the old rather than an increase in public investment can be preferable from the viewpoint of social welfare.public capital, social security, overlapping generations

Sustainability of public debt, investment subsidies, and endogenous growth with heterogeneous firms and financial frictions

This study investigates the effect of public debt on growth, interest rate, and sustaibility of public debt in a very simple endogenous growth model with financial imperfection and the firm heterogeneity. Increases in public debts cause higher real interest rates through financial markets and reduces both the number of firms and private investment, leading to lower long-run growth. It makes public debt less sustainable when public debt is very large. This study also examine the effect of investment subsidy financed by public debt. It hinder economic growth in the long-run although they affect posively on growth in the short run. Therefore, investment subsidy should not be financed by public debt but tax increases

The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach

This study investigates expenditure- and tax-based consolidations under the rule of reductions in debt-to-GDP ratios to the target level and the effects of these consolidations on fiscal sustainability and welfare, using an overlapping generations model with exogenous growth settings. We derive (i) the global transition dynamics of the economy, (ii) a threshold (ceiling) of public debt to ensure fiscal sustainability, (iii) sustainable paces of these consolidations, and (iv) the optimal pace of consolidations from viewpoints of both social welfare and fairness of each generation's welfare. We find that higher paces or lower targets of debt-to-GDP ratio make fiscal policies more sustainable. The pace of tax-based consolidation required to ensure fiscal sustainability is higher than that required of expenditure-based consolidation. As for welfare, countries may differ in their choice of the type of consolidation, which depends on the size of outstanding debts relative to capital, productivity of the economy, tax rate levels, and the extent of utility derived by individuals from public goods and services. More importantly, it may also depend on whether policymakers emphasize social welfare or fairness of welfare distribution between generations. By contrast, a common result from the viewpoints of both social welfare and fair distribution of welfare across generations is that rapid paces of fiscal consolidation are supported

Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT

This study investigates (i) how unfunded public pensions financed by VAT, as discussed in Japan, affect economic growth, and (ii) whether payroll tax or VAT is the more growth-friendly tax structure for the finance of public pensions. We examine these issues in overlapping generations (OLG) models with parental altruism and find the following results. A public pension system financed by VAT itself may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT have turned out to be more growth-friendly than those financed by payroll tax when bequests are operative

Dynamic analysis of reductions in public debt in an endogenous growth model with public capital

* Revised： [12-08-Rev.2, 2014]* Revised： [12-08, 2012]* Revised： [12-08-Rev., 2013