Economic Growth, Public Debt and Welfare: Comparing Three Budgetary Rules

We present an endogenous growth model with externalities of capital and elastic labor supply where we allow for public debt and welfare-enhancing public spending. We analyze different debt policies as regards convergence to a balanced growth path and their effects on long-run growth and welfare. Three budgetary rules are considered: the balanced budget rule, a budgetary rule where debt grows in the long run but at a rate lower than the balanced growth rate and a rule where public debt grows at the same rate as all other economic variables but where it guarantees that the intertemporal budget constraint is fulfilled.