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Productive Government Expenditure In A Stochastically Growing Economy

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  • Turnovsky, Stephen J.

Abstract

This paper analyzes productive government expenditure in a stochasticAK growth model. First, a centrally planned economy is characterized,emphasizing the trade-off between the effects of both deterministicand stochastic government expenditures on the equilibrium growth rateand its variance. Both the growth-maximizing and thewelfare-maximizing shares of government expenditure are derived andshown to depend (differentially) upon the degree of risk in theeconomy. Whereas production risk reduces the welfare-maximizingshare of government expenditure, it may either increase or decreasethe growth-maximizing share, depending upon the degree of riskaversion. Next, the stochastic equilibrium in a decentralized economyis derived. The first-best optimal tax structure is characterized andits dependence on risk is determined. The formal analysis issupplemented by some numerical simulations to assess the quantitativesignificance of risk and the divergence that this generates between thewelfare-maximizing and growth-maximizing size of government.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 3 (1999)
Issue (Month): 04 (December)
Pages: 544-570

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Handle: RePEc:cup:macdyn:v:3:y:1999:i:04:p:544-570_01

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  1. Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
  2. Grinols, E.L. & Turnovsky, S.J., 1992. "Risk, the Financial Market and Macroeconomic Equilibrium," Discussion Papers in Economics at the University of Washington 92-01, Department of Economics at the University of Washington.
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  12. Devereux, Michael B & Smith, Gregor W, 1994. "International Risk Sharing and Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 535-50, August.
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  29. repec:cup:macdyn:v:1:y:1997:i:3:p:615-39 is not listed on IDEAS
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