PUBLIC DEBT AND ECONOMIC GROWTH IN UZAWA’S TWO-SECTOR MODEL WITH PUBLIC GOODS

Abstract

This paper studies public debt dynamics in a neoclassical growth model. The economy consists of one capital, one service and one public sector. The model is a synthesis of Solow’s growth, Uzawa’s two-sector, and Diamond’s debt models. The public sector supplies services which directly affect productivity of the two sectors and welfare of the population. The government finances public expenditure by taxing the outputs, consumption, wealth income, and wage households. The study focuses on the effects of changes in government’s expenditure, the public sector’s productivity, and different taxes on the dynamics of public debt and economic growth. Comparative dynamic analysis examines the effects of changes in preference and polices.

Data:
Received: 19 Sep 2016
Revised: 5 Nov 2016
Accepted: 6 Dec 2016
Published: 20 Dec 2016