Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy

Thomas Krichel () and Paul Levine ()

Scandinavian Journal of Economics, 2001, vol. 103, issue 2, pages 295-316

Abstract: We develop an endogenous growth model driven by externalities from both private and public capital. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We compare the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time-consistent equilibrium is sub-optimal in terms of ex-ante intertemporal welfare, it yields higher long-run growth and welfare, through an accumulation of assets by the state and a cut in government consumption. Copyright 2001 by The editors of the Scandinavian Journal of Economics.

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