A Closed-Form Solution for Determining the Burden of Public Debt in Neoclassical Growth Models

Abstract

This paper develops a new approach, termed as the stock approach, to calculate the steady-state output loss caused by public debt in neoclassical growth models. The novelty of our stock approach is that it provides a closed-form solution to the steady-state output-debt relationship. The main conclusion of the paper is that the steady-state burden of public debt is country-specific in neoclassical growth models and it decreases with the private saving rate and increases with the population growth rate, with exception of the special case where Ricardian equivalence holds.