A Two-Sector Model of Public Investment and Growth

Giulia Felice ()

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: We consider a two-sector economy, where public infrastructure unevenly affects the productivity of the sectors. Private and public capital are produced with different technologies, and the sector producing the infrastructure is not benefiting from its services. The government provides both infrastructure investment and a flow of intermediate goods, enhancing the productivity of the sector producing the infrastructure. We show that this economy displays perpetual growth whenever the share of public expenditure on intermediate goods is higher than that on infrastructure. In the long run the public capital, the private capital and the GDP grow at the same steady rate and the share of total public expenditure on GDP is constant. We study numerically the transition to the long run, along which the structural adjustements take place. We single out the conditions under which the tax rate is growth maximizing.

Keywords: Structural Change; Transition; Public Investments; Growth (search for similar items in EconPapers)
JEL-codes: H5 O14 O41 P20 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-09
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