Government Debt and Aggregate Stability with Endogenous Growth : Some General Results

We consider a general class of endogenous growth models with infinitely lived households and analyze how different budgetary rules affect the stability of the economy. We show that a discretionary fiscal policy implies that the government always violates its inter-temporal budget constraint along a balanced growth path, whereas a balanced budget rule tends to stabilize the economy. A rule based debt policy makes the economy converge to the balanced growth path provided the reaction of the primary surplus to higher public debt is sufficiently large so that the debt to GDP ratio becomes a mean-reverting process