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Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy
Author(s) -
Krichel Thomas,
Levine Paul
Publication year - 2001
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00246
Subject(s) - economics , precommitment , endogenous growth theory , consumption (sociology) , externality , welfare , government (linguistics) , fiscal policy , microeconomics , private consumption , deadweight loss , overlapping generations model , public capital , capital (architecture) , public finance , monetary economics , macroeconomics , human capital , public investment , market economy , social science , linguistics , philosophy , archaeology , sociology , history
We develop an endogenous growth model driven by externalities from both private and public capital. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We compare the optimal and time‐consistent policies in a linear‐quadratic approximation of the model. Although the time‐consistent equilibrium is sub‐optimal in terms of ex‐ante intertemporal welfare, it yields higher long‐run growth and welfare, through an accumulation of assets by the state and a cut in government consumption.