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Economic growth and public debt

Bhattarai, Keshab


Abstract There is a controversy in the literature about the economic contribution of public deficit. Keynesian economists generally argue that by spending more on goods and services and infrastructure possible budget deficit is helpful to create more jobs, reduce unemployment rate and raise the rate of economic growth of an economy. Neoclassical economists are worried about the adverse consequences of public deficit on capital accumulation and economic growth rate. Under classical Ricardian equivalence proposition private savings offsets public dis-saving thus budget deficit does not matter in the long run. Development economist often warn against the adverse consequences of budget deficit on inflation, current account balances and redistribution of income. Empirical evidence is found for a positive or a negative or no effect of debt on growth. Debt promote growth if it is used for investment and harms growth if it is used for consumption. Whether debt is more for investment or consumption depends on economic and political circumstances of a country.

Peer Reviewed Not Peer Reviewed
Keywords Growth, Inflation, Budget deficit


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