Robert Waldmann (2016): Dynamic Inefficiency: "Is public ...

Robert Waldmann (2016): Dynamic Inefficiency: "Is public debt a burden?... It is possible in theory that the answer is no and that higher [initial] public debt causes permanently higher [balanced-growth path] consumption and welfare.... This is called dynamic inefficiency. The standard result from simple models is that an economy is dynamically inefficient if r is less than g where r is the real interest rate and g is the rate of GDP growth...

...This formula isn���t very useful in the real world, because... there is a low real interest rate on safe assets and higher rates on risky assets. The standard interpretation of ���r��� is that it refers to the ratio of total capital income to total capital.... The question of interest is whether increased public debt can cause increased welfare when the safe real interest rate rsafe is lower than g but the average return on capital r is greater than g. I think the answer is yes, so I think it is plausible that, in the real world, greater public debt will cause permanently higher welfare...

https://delong.typepad.com/dynamicinefficiency-2.pdf

#noted #publicfinance #fiscalpolicy #equitablegrowth