OPTIMAL FISCAL POLICY IN A GROWING ECONOMY WITH PUBLIC CAPITAL

Manuel Gómez

Macroeconomic Dynamics, 2004, vol. 8, issue 4, 419-435

Abstract: This paper devises a fiscal policy by means of which the first-best optimal equilibrium can be attained as a market equilibrium in an endogenous growth model with public capital. The optimal equilibrium requires that public (private) investment be zero along the transition to the balanced growth path if the initial ratio of public to private capital is higher (lower) than its long-term value. We also show that the transitional dynamics can be determined by noting that the continuity of the shadow prices involves the continuity of the consumption path.

Date: 2004
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