On Budgetary Policies and Economic Growth

George Alogoskoufis and Frederick (Rick) van der Ploeg

No 496, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates the implications of budgetary policies for consumption and economic growth. We present a model that combines the Arrow-Romer endogenous growth model with the Blanchard-Yaari overlapping-generations model. We show that a rise in government debt, financed by lump-sum taxes, increases the share of private consumption to national income and reduces the long-run growth rate. We also show that a rise in government consumption financed by lump-sum taxes reduces both the share of private consumption in national income and the long-run growth rate. These results do not follow in infinite-horizon, representative-household models of endogenous growth. In such models the substitution of debt for tax finance does not affect consumption and the growth rate, and a balanced budget increase in government consumption crowds out private consumption one-for-one, without any effects on the growth rate. The paper examines the dynamic adjustment of consumption, growth and government debt to a temporary tax cut, and briefly discusses the empirical implications of the results.

Keywords: Budgetary Policy; Burden of Debt; Consumption; Endogenous Growth (search for similar items in EconPapers)
Date: 1990-12
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Citations: View citations in EconPapers (4)

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