Animal Spirits and Public Production in Slow Growth Economies

Stefano Bosi () and Carine Nourry
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Stefano Bosi: EPEE, University of Evry

No 05-16, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: In this paper, we consider a discrete time version of the endogenous growth model developed by Barro [1], but augmented in order to consider public production. Policy solutions are characterized to maximize the social welfare and stabilize the economy. More intervention is required under a higher elasticity of intertemporal substitution, because the public good is a productive externality. As soon as the growth rate of the economy lowers, indeterminacy can be generated by higher degrees of private production, and, then, even a small proportion of public production can have a stabilizing effect. Moreover, the way the public dividends are used matters for the stability properties of the economy: public dividends are used to provide flows of public services and/or long-run infrastructures. According to the value of the elasticity of intertemporal substitution and the proportion of public and private production, a higher share of public dividends used to install infrastructures can stabilize the economy. Endogenous fluctuations are possible within the model for plausible calibrations.

Keywords: public spending; growth cycles; sunspots (search for similar items in EconPapers)
JEL-codes: H4 N1 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2005
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