The macroeconomic effects of fiscal policy in a stochastically growing economy

Toshiki Tamai

Economic Modelling, 2013, vol. 35, issue C, 464-471

Abstract: This paper develops a stochastic model of endogenous growth with productive government expenditure. Herein, we specify the CES production function according to recent empirical evidence. The elasticity of substitution plays a key role in determining macroeconomic performance and the effectiveness of fiscal policy under uncertainty. Results demonstrate that a large elasticity of substitution provides a large expected growth rate and also large volatility of the growth rate. Regarding these effects, the growth-maximizing tax rate and welfare-maximizing tax rate under uncertainty are larger or smaller than those of deterministic economy according to the elasticity of substitution.

Keywords: Fiscal policy; Stochastic growth (search for similar items in EconPapers)
JEL-codes: H54 O11 O40 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:35:y:2013:i:c:p:464-471

DOI: 10.1016/j.econmod.2013.08.001

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