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Fiscal Policy and Equitable Growth
Author(s) -
Park Hyun
Publication year - 2010
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2009.00543.x
Subject(s) - economics , fiscal policy , consumption (sociology) , endogenous growth theory , investment (military) , macroeconomics , general equilibrium theory , monetary economics , tax policy , fiscal union , public economics , tax reform , market economy , politics , social science , sociology , political science , law , human capital
This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state‐contingent redistributive transfers. The paper shows that in a general‐equilibrium model with given exogenous fiscal policy, a nonmonotonic relation exists between the suboptimal long‐run growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two properties suggest that an alternative set of government policy instruments affects the response of private sector investment to fiscal policy. Moreover, the different properties of exogenous and endogenous fiscal policy theoretically account for the difference in the relation between economic growth and fiscal policy in empirical studies.