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Fiscal Policy in an Endogenous Growth Model with Productive Government Spending
Author(s) -
Greiner Alfred
Publication year - 1999
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/1467-999x.00067
Subject(s) - economics , endogenous growth theory , subsidy , fiscal policy , government spending , consumption (sociology) , tax rate , investment (military) , growth model , per capita , public spending , macroeconomics , monetary economics , labour economics , welfare , market economy , human capital , social science , population , demography , sociology , politics , political science , law
The goal of this paper is to analyse the effects of fiscal policy upon the long‐run balanced growth rate in an endogenous growth model in which sustained per capita growth is the result of productive government spending. Assuming that labour is supplied inelastically, it is shown that increases in non‐productive government spending, i.e. public consumption or lump‐sum transfers, always reduce the balanced growth rate, whereas there exists a growth‐maximizing investment subsidy rate and income tax rate. Moreover, a rise in a tax on consumption increases economic growth if it raises public investment. If labour supply is elastic the elasticity of labour supply crucially determines the growth‐maximizing income tax rate and an increase in the tax on consumption may raise or lower economic growth.