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Dynamic fiscal policies and unemployment in a simple endogenous growth model

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  • Stefan Josten

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    Abstract

    This paper analyzes the growth and employment effects of dynamic fiscal policies in an overlapping generations model with endogenous growth and imperfect labour markets. With balanced-budget policies, the modelled closed economy grows at a constant rate which is higher, the lower are the labour tax rate and the unemployment rate. Constant-flow budget policies are not feasible, while government Ponzi games are feasible only if economic agents have implausibly high savings rates. Furthermore, while constant-stock fiscal policies are sustainable, an increase in the debt-to-capital ratio is accompanied by higher taxes, a rise in unemployment and lower economic growth. Copyright Springer Science + Business Media, LLC 2006

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    File URL: http://hdl.handle.net/10.1007/s10797-006-6603-5
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    Bibliographic Info

    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 13 (2006)
    Issue (Month): 6 (November)
    Pages: 701-716

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    Handle: RePEc:kap:itaxpf:v:13:y:2006:i:6:p:701-716

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    Web page: http://www.springerlink.com/link.asp?id=102915

    Related research

    Keywords: Unemployment; Public debt; Economic growth; Fiscal policy;

    References

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    1. Francesco Daveri & Guido Tabellini, . "Unemployment, Growth and Taxation in Industrial Countries," Working Papers 122, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Susanto Basu & John G. Fernald, 1999. "Are Apparent Productive Spillovers a Figment of Specification Error?," NBER Working Papers 5073, National Bureau of Economic Research, Inc.
    3. O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August.
    4. Cahuc, P. & Michel, P., 1992. "Minimum Wage, Unemployment and Growth," Papiers d'Economie Mathématique et Applications 92.35, Université Panthéon-Sorbonne (Paris 1).
    5. C Bean & Christopher A. Pissarides, 1992. "Unemployment, Consumption and Growth," CEP Discussion Papers dp0100, Centre for Economic Performance, LSE.
    6. Aghion, Philippe & Howitt, Peter, 1991. "Growth and Unemployment," CEPR Discussion Papers 577, C.E.P.R. Discussion Papers.
    7. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
    8. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
    9. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    10. Fabio Arico, 2003. "Growth and Unemployment: Towards a Theoretical Integration," Journal of Economic Surveys, Wiley Blackwell, vol. 17(3), pages 419-455, 07.
    11. Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April.
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    Cited by:
    1. Luciano Fanti & Luca Gori, 2011. "On economic growth and minimum wages," Journal of Economics, Springer, vol. 103(1), pages 59-82, May.

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