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Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy

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  • Krichel, Thomas
  • Levine, Paul

Abstract

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. Copyright 2001 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 103 (2001)
Issue (Month): 2 (June)
Pages: 295-316

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Handle: RePEc:bla:scandj:v:103:y:2001:i:2:p:295-316

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Fedderke, Johannes W. & Bogetic & Zeljko, 2006. "Infrastructure and growth in South Africa : direct and indirect productivity impacts of 19 infrastructure measures," Policy Research Working Paper Series 3989, The World Bank.

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