Munich Personal RePEc Archive

Fiscal Expansion, Government Debt and Economic Growth: A Post-Keynesian Perspective

Parui, Pintu (2020): Fiscal Expansion, Government Debt and Economic Growth: A Post-Keynesian Perspective.

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Constructing a post-Keynesian growth model, we try to explore how the interaction between capital accumulation and government debt opens up the possibility of multiple equilibria and instability in the economy. We investigate the impact of various parameters such as different tax rates, savings propensities, interest rate etc. on the short run aggregate demand and long run equilibrium growth rate and fiscal debt-capital ratio. We explore the relationship between a progressive tax system and wage-led demand regime. We show that when there is fiscal deficit and government incurs debt, a sufficiently high government expenditure to GDP ratio is essential for achieving stability in the system. Moreover, in a certain case, a low speed of adjustment of the rate of capital accumulation is required, as otherwise, the economy may lose its stability and produces the limit cycles. In case of a moderate level of a fiscal expenditure to GDP ratio, when Keynesian stability condition is satisfied, a lower rate of interest and a higher autonomous investment demand are desirable as they enhance the stable region of the economy.

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