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Fiscal policy in a stochastic model of endogenous growth

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  • Canton, Erik

Abstract

It is nowadays widely believed that public schooling may contribute favourably to long-term economic growth. The income tax rates that are needed to finance government spending typically show an erratic time pattern. Such tax randomness could increase the intensity of the business cycle. Thus, government spending on education may spur economic growth, but the other side of the coin is that this is likely to increase the intensity of cyclical fluctuations. These issues are discussed in the context of a stochastic endogenous growth model with learning-by-doing as well as schooling activity. The key results are: (i) income taxation may go hand in hand with increased economic growth under certain conditions, (ii) tax randomness is responsible for a modest fraction of cyclical variability, (iii) the inclusion of stochastic taxation brings the model closer to the U.S. business cycle experience, (iv) the employment variability puzzle can be solved by introducing stochastic discounting, (v) the latter model can successfully pass a Wald-test, (vi) the interaction between long-term economic growth and the business cycle can be positive as well as negative, and (vii) the model typically suggests that capital taxes stabilize the economy.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 18 (2001)
Issue (Month): 1 (January)
Pages: 19-47

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Handle: RePEc:eee:ecmode:v:18:y:2001:i:1:p:19-47

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Web page: http://www.elsevier.com/locate/inca/30411

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Citations

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Cited by:
  1. Bayraktar, Nihal & Moreira, Emmanuel Pinto, 2007. "The composition of public expenditure and growth : a small-scale intertemporal model for low-income countries," Policy Research Working Paper Series 4430, The World Bank.
  2. T.C.Y. Kam & G.C. Lim, 2001. "Interest Rate Smoothing and Inflation-Output Variabilityin a Small Open Economy," Department of Economics - Working Papers Series 817, The University of Melbourne.
  3. Canton, E.J.F., 1997. "Fiscal Policy in a Stochastic Model of Endogenous Growth," Discussion Paper 1997-63, Tilburg University, Center for Economic Research.
  4. Ghassan, Hassan B., 2003. "Test de l’effet de stabilisation automatique par la modélisation SVAR sans contrainte de long terme
    [Testing the Automatic Stabilization Effect: Evidence from SVAR Model without Long-Term Constr
    ," MPRA Paper 56387, University Library of Munich, Germany, revised 02 Apr 2003.

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