Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare

Michael Donadelli and Patrick Grüning

The North American Journal of Economics and Finance, 2021, vol. 57, issue C

Abstract: We study the equilibrium implications of different fiscal policies on macroeconomic quantities and welfare by utilizing an endogenous growth model that matches asset pricing data well. The fiscal instruments of interest are (i) subsidies to R&D expenditure, consumption and capital investment, and (ii) cuts in labor and corporate tax rates. Our equilibrium analysis provides new insights on the interplay of innovation dynamics and fiscal policy. Importantly, we find growth and welfare to be inversely related when changing R&D subsidies. However, this depends on how well the model reproduces asset pricing dynamics. Moreover, only subsidies to capital investments and cuts in the corporate tax rate have the potential to increase both growth and welfare.

Keywords: Endogenous growth; Fiscal policy; Government subsidies; Tax rates; Welfare; General equilibrium (search for similar items in EconPapers)
JEL-codes: E22 G12 H20 I30 O30 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000607

DOI: 10.1016/j.najef.2021.101430

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