Global directed technical change model with fiscal and monetary policies, and public debt

• Published in: Economic change and restructuring Vol. 57; no. 2; p. 85
• Main Authors: Loureiro, Daniel, Afonso, Oscar, Vasconcelos, Paulo B.
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-04-2024; Springer Nature B.V
• Subjects: Deficit financing; Development Economics; Economic Growth; Economic performance; Economic Policy; Economics; Economics and Finance; Endogenous; Externality; Fiscal policy; Growth models; Growth rate; Inequality; International Economics; Macroeconomics/Monetary Economics//Financial Economics; Monetary policy; North and South; Political Economy/Economic Systems; Productivity; Public debt; R&D; Research & development; Risk; Risk premiums; Subsidies; Wage differential; Fiscal policy; Subsidies; Public debt; R&D endogenous growth; Monetary union; E41, E62, F16, F43, F45, O31, O33, O40
• ISSN: 1573-9414; 1574-0277
• DOI: 10.1007/s10644-024-09672-3

We develop an endogenous growth model with North–South interactions, monetary policy, and a multi-dimensional role for fiscal policy. To boost economic performance, the government of the less developed country subsidizes R&D and intermediate goods production. Besides, to account for the effects of excessive public debt, we introduce a negative externality on productivity and a risk premium effect. Our findings reveal that the steady-state growth rate of both economies depends positively on the subsidies in the South and negatively on the public debt’s externality on productivity and the risk premium affecting the indebted economy. Additionally, public debt externalities increase the equilibrium wage inequality, making it more significant in the South. To minimize these effects, both countries can agree to mutualize their debts to overcome the risk premium. Then, the economy’s steady-state growth rate would increase in both countries. Finally, several policy implications were retrieved.