Debt, Wealth and the Rate of Growth: An Exercise in Equilibrium Dynamics

Abstract

The purpose of this chapter is to work out certain stylised relationships between budget balance, wealth and growth. The theoretical basis will be provided by the standard Domar references on the subject of growth (Domar, 1946, 1947). Our analysis may appear old-fashioned, because it is carried out under the conventional assumption that public debt acts in the economy as a component of private wealth (a negative component, when public debt is negative), just like private physical capital, thereby disregarding the modern revival of Ricardo’s equivalence hypothesis. Also, it is framed exclusively in terms of real output growth, with no explicit account of the problems of monetary growth and inflation. Although these are strong limitations, in our view the exercise, which requires no more than elementary algebra, does retain some meaningful economics.