This paper investigates the implications of budgetary policies for consumption and economic growth. We present a model that combines the Arrow-Romer endogenous growth model with the Blanchard-Yaari overlapping-generations model. We show that a rise in government debt, financed by lump-sum taxes, increases the share of private consumption to national income and reduces the long-run growth rate. We also show that a rise in government consumption financed by lump-sum taxes reduces both the share of private consumption in national income and the long-run growth rate. These results do not follow in infinite-horizon, representative-household models of endogenous growth. In such models the substitution of debt for tax finance does not affect consumption and the growth rate, and a balanced budget increase in government consumption crowds out private consumption one-for-one, without any effects on the growth rate. The paper examines the dynamic adjustment of consumption, growth and government debt to a temporary tax cut, and briefly discusses the empirical implications of the results.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
496.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)