Human Capital Formation, Public Debt and Economic Growth

Abstract

This paper presents an endogenous growth model with human capital, where human capital formation is the result of public education. The government finances expenditures in the schooling sector by the tax revenue and by public deficit. In addition, the government sets the primary surplus such that it is a positive linear function of public debt which guarantees that public debt is sustainable. The paper analyzes the structure of the growth model and derives implications of public debt. Further, a sensitivity analysis of the dynamics of the model is presented and it turns out that the parameter determining the reaction of the primary surplus to changes in public debt is decisive as concerns stability of the model.