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COMPARATIVE DYNAMICS AND OPTIMAL FISCAL POLICY IN A SIMPLE MODEL OF ENDOGENOUS GROWTH
Author(s) -
Weber Christian E.
Publication year - 2006
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/j.1467-999x.2006.00242.x
Subject(s) - economics , transfer payment , endogenous growth theory , government (linguistics) , fiscal policy , payment , public finance , growth model , monetary economics , public economics , macroeconomics , microeconomics , finance , market economy , welfare , linguistics , philosophy , human capital
I analyze optimal fiscal policy choices in a continuous time endogenous growth model similar to Barro’s. The government uses income taxes from representative ‘rich’ and ‘poor’ households to finance purchases of productive goods and to make transfer payments to poor households. Increases in government purchases can increase the growth rate, while increases in transfers reduce growth. I examine the socially optimal allocation of government resources to purchases and transfer payments and describe conditions under which both the rich and poor would benefit from cuts in entitlements if the savings are used to finance increased government purchases of productive goods.