Innovation-led growth in a time of debt

Domenico Ferraro, Pietro F. Peretto

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

We study the effects of large reductions in government budget deficits (labeled “fiscal consolidations”) on firms’ entry, innovative investments, productivity and per capita output growth in a model of endogenous technological change. Due to the absence of lump-sum taxes, temporary budget deficits set government debt-output ratios on unsustainable paths. An equilibrium then requires the specification of a date at which the debt-output ratio is stabilized at a constant finite value. We discipline parameters using post-war observations for the U.S. economy. We find that fiscal consolidations produce persistent growth slowdowns, permanently lowering the path of per capita output relative to a benchmark economy in which the fiscal consolidation is achieved with lump-sum taxes. These output losses are sizable. In this sense, government debt is a burden on the economy. Tax-based consolidations produce output losses that are twice as large as those from spending-based consolidations.

Original languageEnglish (US)
Article number103350
JournalEuropean Economic Review
Volume121
DOIs
StatePublished - Jan 2020

Keywords

  • Budget deficits
  • Firms’ entry
  • Government debt
  • Government spending
  • Growth
  • Innovation
  • Taxes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Innovation-led growth in a time of debt'. Together they form a unique fingerprint.

Cite this