How Budget Deficit Impairs Long-Term Growth and Welfare under Perfect Capital Mobility

Michał Konopczyński

Abstract

This paper investigates the implications of the size of budget deficit in the open economy under perfect mobility of capital. For that purpose we construct a general equilibrium model with consumers maximizing the discounted utility of consumption, and firms maximizing profits. Government sets the size of the deficit relative to GDP and controls the structure of public debt. Using standard methods of optimal control theory we solve the model, i.e. we find explicit formulas for all trajectories and the level of welfare. Finally, we show that the higher the deficit-to-GDP ratio, the lower the welfare of consumers. Similarly, welfare increases with the share of foreign creditors in public debt.
Author Michał Konopczyński (WIiGE / KEM)
Michał Konopczyński,,
- Department of Mathematical Economics
Journal seriesCentral European Journal of Economic Modelling and Econometrics, ISSN 2080-0886, e-ISSN 2080-119X, (B 14 pkt)
Issue year2014
No6
Pages129-152
Publication size in sheets1.15
Keywords in Englishbudget deficit, optimal fiscal policy, perfect capital mobility
DOIDOI:10.24425/cejeme.2014.119237
URL http://cejeme.org/previousvolumes.aspx
Languageen angielski
Score (nominal)14
Score sourcejournalList
ScoreMinisterial score = 8.0, 16-12-2019, ArticleFromJournal
Ministerial score (2013-2016) = 14.0, 16-12-2019, ArticleFromJournal
Citation count*2 (2020-09-15)
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