Dynamic Aspect of Growth and Fiscal Policy

Thomas Krichel () and Paul Levine ()

Department of Economics Discussion Papers from Department of Economics, University of Surrey

Abstract: We develop an endogenous growth model driven by externalities of both private capital and public infrastructure. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We first study the steady state, focusing in detail on the non-Ricardian aspects of the model. We then examine the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time consistent equilibrium is also sub-optimal in terms of steady-state welfare, it does yield higher growth, through an accumulation of assets by the state and a cut of government consumption.

Keywords: endogenous growth; fiscal policy; time inconsistency. (search for similar items in EconPapers)
JEL-codes: C61 E21 E23 E62 O41 (search for similar items in EconPapers)
Date: Written 1996-03
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