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Quantifying Optimal Growth Policy
Author(s) -
GROSSMANN VOLKER,
STEGER THOMAS M.,
TRIMBORN TIMO
Publication year - 2016
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12151
Subject(s) - economics , subsidy , endogenous growth theory , welfare , investment (military) , growth model , order (exchange) , tax policy , capital (architecture) , capital accumulation , microeconomics , macroeconomics , human capital , public economics , tax reform , finance , market economy , archaeology , politics , political science , law , history
We determine the optimal growth policy within a comprehensive endogenous growth model. The model accounts for important elements of the tax transfer system and for transitional dynamics. It captures the three main growth engines based on standard ingredients in order to understand the quantitative policy and welfare implications of the existing theory. Our calibrated model indicates that the current policy leads to severe underinvestment in both R&D and physical capital, implying that both R&D and capital investment subsidies should be increased substantially. We argue that previous research has overlooked a strong evidence for the welfare significance of the quest for the optimal growth policy by failing to calibrate the distortionary tax system.