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Binding Constraints and Second-Best Strategies in Endogenous Growth Models with Public Finance

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Author Info

  • Misch Florian

    (Centre for European Economic Research)

  • Gemmell Norman

    (University of Nottingham and The Treasury, New Zealand)

  • Kneller Richard

    (University of Notingham)

Abstract

This paper uses an endogenous growth model with public finance to test whether alleviating the most binding constraint to growth corresponds to the optimal fiscal policy adjustment. It makes two contributions: first, it shows that this strategy is optimal if there is only one policy adjustment which alleviates the most binding constraint. When there are several, some of them may in fact reduce growth. The second contribution is therefore to develop a simple guiding principle for this situation: we show that it is likely optimal to adopt the policy adjustment which alleviates the most and worsens the least binding constraint.

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File URL: http://www.degruyter.com/view/j/jgd.2010.1.2/jgd.2010.1.2.1068/jgd.2010.1.2.1068.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal Journal of Globalization and Development.

Volume (Year): 1 (2010)
Issue (Month): 2 (December)
Pages: 1-37

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Handle: RePEc:bpj:globdv:v:1:y:2010:i:2:n:3

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Web page: http://www.degruyter.com

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Web: http://www.degruyter.com/view/j/jgd

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Cited by:
  1. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2014. "Using Surveys of Business Perceptions as a Guide to Growth-Enhancing Fiscal Reforms," Working Paper Series 3140, Victoria University of Wellington, Chair in Public Finance.

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