Sustainability of public debt: Some theoretical considerations

This paper elaborates on the relationship between sustainability of public debt and the debt to GDP ratio in case the interest rate on public debt exceeds the growth rate of GDP. When the primary surplus relative to GDP positively reacts to a higher debt to GDP ratio, a bounded debt to GDP ratio guarantees sustainability. Further, an unbounded debt to GDP ratio is not compatible with sustainability, even if the primary surplus relative to GDP strictly rises as the debt to GDP ratio increases. Finally, sustainability is excluded if the initial debt to GDP ratio exceeds a critical threshold.Public Debt, Primary Surplus, Inter-temporal Budget Constraint, Sustainability

Indeterminacy and the distribution of growth rates

In endogenous growth theory models exist which are characterized by local and global indeterminacy. These concepts imply that economies differ with respect to their growth rates on the transition path (local indeterminacy) as well as their long-run growth rates (global indeterminacy). While the empirical density function of the levels of aggregate GDP has been the subject of a great many studies, the distribution of the growth rates has not yet been analyzed. In this paper, recent research on the evolution of the world income distribution is expanded by an analysis of the evolution of the distribution of growth rates for a sample of 104 countries. It is found that this distribution is remarkably stable over the period 1960-90.

Testing Sustainability of German Fiscal Policy. Evidence for the Period 1960 – 2003

In this paper we test whether German public debt has been sustainable by resorting to a test proposed by Bohn (1998). We apply non-parametric and semi-parametric regressions with time depending coefficients. This test shows that the mean of the coefficient relevant for sustainability has been significantly positive over the time period considered. However, there is a negative trend in that coefficient which seems to have ceased to decline only in the middle to late 1990s. Further, we find evidence that the response of the primary deficit is a U-shaped function of the debt ratio which first declines and then rises after a certain threshold of the debt ratio is exceeded.public debt, intertemporal budget constraint, varying coefficient model, non-parametric estimation

Environmental pollution in a growing economy with endogenous structural change

In this paper we study the impact of environmental pollution in an endogenous growth model that allows for structural change. The model is based on doublydifffferentiated R&D where newer, less polluting technologies gradually replace older ones. The analysis shows that the presence of environmental externalities stimulates structural change but reduces the growth rate of the economy. Further, comparing the models with and without structural change demonstrates that the latter implies stronger environmental damages and, consequently, a lower growth rate than the ffirst one. Finally, levying a tax on the polluting output speeds up structural change, thus, reducing environmental pollution and spurring economic growth. This can give new support for the double dividend hypothesis

Employment Cycles, Low Income Work and the Dynamic Impact of Minimum Wages. A Macro Perspective

In this paper we investigate the macroeconomic consequences of the introduction of an unemployment benefit system and a minimum wage barrier for both skilled and unskilled workers against the background of Goodwin's (1967) model. In the analyzed framework, characterized by free "hiring" and "firing" in the first labor markets, we can show a) that large fluctuations in employment are made (at least partially) socially acceptable through the workfare nature of the unemployment benefit system and b) that minimum real wages provide additional stability to the system dynamics by decreasing the amplitude of the fluctuations in employment and income distribution (and the related degradation of the workforce skills and family structures they are otherwise subject to).Distributive cycles, minimum wages, stability, combined wages, base income, workfare

Sustainable Capitalism: Full-Employment Flexicurity Growth with Real Wage Rigidities

In this paper we present a model of flexicurity capitalism that exhibits a second labor market with the government as an employer of first resort, where all workers not employed by firms in the private sector find meaningful employment. We show that the model exhibits a unique interior steady state which is asymptotically stable under real wage adjustment dynamics of the type considered in Blanchard and Katz (1999), and under a type of Okun's Law that links the level of utilization of firms to their hiring and firing decision. The introduction of a company pension fund can be shown to contribute to the viability of the analyzed economic system. However, when credit is incorporated in the model, in place of savings-driven supply side fluctuations in economic activity, investment-driven demand side business cycle fluctuations (of a probably much more volatile type) can take place.Flexicurity, employer of ¯rst resort, Solovian growth, company pension funds, sustainability

Environmental pollution in a growing economy with endogenous structural change

In this paper we study the impact of environmental pollution in an endogenous growth model that allows for structural change. The model is based on doublydifffferentiated R&D where newer, less polluting technologies gradually replace older ones. The analysis shows that the presence of environmental externalities stimulates structural change but reduces the growth rate of the economy. Further, comparing the models with and without structural change demonstrates that the latter implies stronger environmental damages and, consequently, a lower growth rate than the ffirst one. Finally, levying a tax on the polluting output speeds up structural change, thus, reducing environmental pollution and spurring economic growth. This can give new support for the double dividend hypothesis

Technology lock-in with horizontal and vertical innovations through limited R&D spending

In this paper we analyze an inter-temporal optimization problem of a representative firm that invests in horizontal and vertical innovations and that faces a constraint with respect to total R&D spending. We find that there can exist two different steady-states of the economy when the amount of research spending falls short of an endogenously determined threshold: one with higher productivities and less new technologies being developed, and the other with more technologies being created and lower productivities. But, for a higher amount of R&D spending the steady-state becomes unique and the firm produces the whole spectrum of available technologies. Thus, a lock-in effect may arise that, however, van be overcome by raising R&D spending sufficiently

How to spend 750 billion euro? Applying sacrifice theory to determine Covid-19 compensations in the EU

Greiner A, Owusu B. How to spend 750 billion euro? Applying sacrifice theory to determine Covid-19 compensations in the EU. Universität Bielefeld Working Papers in Economics and Management. Vol 04-2020. Bielefeld: Bielefeld University, Department of Business Administration and Economics; 2020.In this note we consider an economic union consisting of sovereign national states. An asymmetric shock hits the union and as a result it decides to set up a fund in order to compensate the countries in the union. We show how sacrifice theory can be used to determine the compensation payments for the countries in a way such that the relative damages after compensation are equal across countries. Finally, we apply our results to determine the Covid-19 compensation payments in the EU

Fiscal policy, public expenditure composition, and growth theory and empirics

This paper responds to the development policy debate involving the World Bank and the IMF on the use of fiscal policy not only for economic stabilization but also to promote economic growth and increase per capita income. A key issue in this debate relates to the effect of the composition of public expenditure on economic growth. Policy makers and some researchers have argued that expenditure on growth-enhancing functions could enhance future revenue and justify the provision of"fiscal space"in the budget. But there are no simple ways to identify the growth-maximizing composition of public expenditure. The current paper lays out a research strategy to explore the effects of fiscal policy, including the composition of public expenditure, on economic growth, using a time series approach. Based on the modeling strategy of Greiner, Semmler and Gong (2005) we develop a general model that features a government that undertakes public expenditure on (a) education and health facilities which enhance human capital, (b) public infrastructure such as roads and bridges necessary for market activity, (c) public administration to support government functions, (d) transfers and public consumption facilities, and (e) debt service. The proposed model is numerically solved, calibrated and the impact of the composition of public expenditure on the long-run per capita income explored for low-, lower-middle- and upper-middle-income countries. Policy implications and practical policy rules are spelled out, the extension to an estimable model indicated, a debt sustainability test proposed, and the out-of-steady-state dynamics studied.Economic Theory&Research,Debt Markets,,Public Sector Expenditure Analysis&Management,Access to Finance