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A Two-Sector Model of Public Investment and Growth

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  • Giulia Felice
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    Abstract

    We consider a two-sector economy, where public infrastructure unevenly affects the productivity of the sectors. Private and public capital are produced with different technologies, and the sector producing the infrastructure is not benefiting from its services. The government provides both infrastructure investment and a flow of intermediate goods, enhancing the productivity of the sector producing the infrastructure. We show that this economy displays perpetual growth whenever the share of public expenditure on intermediate goods is higher than that on infrastructure. In the long run the public capital, the private capital and the GDP grow at the same steady rate and the share of total public expenditure on GDP is constant. We study numerically the transition to the long run, along which the structural adjustements take place. We single out the conditions under which the tax rate is growth maximizing.

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    Bibliographic Info

    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c015_060.

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    Length: 29 pages
    Date of creation: Sep 2010
    Date of revision:
    Handle: RePEc:deg:conpap:c015_060

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    Keywords: Structural Change; Transition; Public Investments; Growth;

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    1. J. M. Albala-Bertrand & E. C. Mamatzakis, 2007. "The Impact Of Disaggregated Infrastructure Capital On The Productivity Growth Of The Chilean Economy," Manchester School, University of Manchester, vol. 75(2), pages 258-273, 03.
    2. Chatterjee, Santanu & Sakoulis, Georgios & Turnovsky, Stephen J., 2003. "Unilateral capital transfers, public investment, and economic growth," European Economic Review, Elsevier, Elsevier, vol. 47(6), pages 1077-1103, December.
    3. Turnovsky, Stephen J., 1996. "Optimal tax, debt, and expenditure policies in a growing economy," Journal of Public Economics, Elsevier, Elsevier, vol. 60(1), pages 21-44, April.
    4. Romp, Ward & de Haan, Jakob, 2005. "Public capital and economic growth: a critical survey," EIB Papers 2/2005, European Investment Bank, Economics Department.
    5. Bonatti, Luigi & Felice, Giulia, 2008. "Endogenous growth and changing sectoral composition in advanced economies," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 19(2), pages 109-131, June.
    6. Daron Acemoglu & Veronica Guerrieri, 2006. "Capital Deepening and Non-Balanced Economic Growth," NBER Working Papers 12475, National Bureau of Economic Research, Inc.
    7. Alberto Bucci & Chiara Del Bo, 2012. "On the interaction between public and private capital in economic growth," Journal of Economics, Springer, Springer, vol. 106(2), pages 133-152, June.
    8. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
    9. Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 1(03), pages 615-639, September.
    10. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 95(4), pages 607-25, December.
    11. Fisher, Walter H & Turnovsky, Stephen J, 1998. "Public Investment, Congestion, and Private Capital Accumulation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(447), pages 399-413, March.
    12. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(6), pages 1173-1187, November.
    13. Chiara F. Del Bo & Massimo Florio, 2011. "Infrastructure and Growth in a Spatial Framework: Evidence from the EU regions," European Planning Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 20(8), pages 1393-1414, October.
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