Public Expenditure and Economic Growth. A Critical Extension of Barro's (1990) Model

Renato Balducci

Economia politica, 2006, issue 2, 163-172

Abstract: My aim is to verify whether the results obtained by Barro (1990) regarding the effects of both productive investments and public consumption on economic growth are also uphold in a more general context. As is well-known, public expenditure may exert an effect on the economic growth rate through positive externality in the productivity of capital stock. When public expenditure in the households' utility function is considered, a further effect operates to modify the saving and investment decisions of households, depending on the relative weight of public consumption. In particular, if households consider public expenditure to be useful, I shall show that - whatever the exogenous fiscal policy may be - the growth rate is always higher than it is in the case of productive investments alone. Moreover, if households are able to choose the optimal income tax rate, an optimal growth rate g* greater than the maximum growth rate g° may be obtained.

Date: 2006
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