Public debt and economic growth are two issues of major concern in the
debate about economic policy. Since the mid 1970s most Organization of Economic
Cooperation and Development (OECD) countries have experienced
lasting budget deficits and, as a consequence, rising debt to GDP ratios. In the
European Union’s (EU) largest economy, Germany, public debt exploded in
the years following the reunification; and in Asia’s largest economy, Japan,
the ratio of debt to GDP doubled during the 1990s. It is noteworthy that, in
both Germany and Japan, economic growth declined dramatically from the
1970s to the 1990s. All this contrasts to the United States, where high deficits
during the 1980s have turned into balanced budgets and even surpluses at
the end 1990s, and growth rates have remained more or less stable.
This paper analyzes the dynamics of budget deficits, public debt, and
economic growth. The analysis is based on an endogenous growth model as