National Debt and Economic Growth with Externalities and Congestions

Abstract

The purpose of this study is to examine the dynamic interdependence between national debt and economic growth with externalities and congestions in public good in a generalized neoclassical threesector growth model. The economy has two production sectors and one public sector. We describe nonlinear dynamic interactions between growth, economic structural change, capital accumulation, externalities and congestions, and public debt under different combinations of taxes on the industrial good sector, the service sector, the wage income, the rate of interest, consumption of good, and consumption of service. We simulate the motion of the economic system and demonstrate the existence of two equilibrium points. The one equilibrium point with higher national output and capital is stable, and the other one with lower national output and capital is unstable. We examine how the stable and unstable paths react to changes.