Does it Pay to Have a Balanced Government Budget?

This paper presents an endogenous growth model with public capital and public debt. The primary-surplus-to-GDP ratio is set such that it is a positive function of the debt ratio, which is a necessary condition for the intertemporal budget constraint of the government. The paper studies growth and welfare effects of the model, assuming a balanced government budget, and compares the outcome with the scenario where public debt grows in the long run, but at a smaller rate than capital and consumption, and with the scenario where public debt grows at the same rate as capital and consumption.