Public Debt in a Federation - Growth and Stability / Staatsverschuldung in einer Föderation - Wachstum und Stabilität

Summary In this paper a neoclassical growth model is used to analyze public debt in a growing economy with two levels of government. The main focus is on the existence and the stability of long run equilibria in a growing federal state. It is shown that the equilibrium in a federation with two levels of government is more likely to be unstable than the equilibrium in a centralized state. Moreover, if the saving rate is below the golden rule, the equilibrium will be unambiguously unstable. In order to avoid instability, sufficient flexibility at all levels of government in federations and confederations such as the European union is required.