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Fiscal policy in a stochastic model of endogenous growth

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Author Info
Canton, E. (Tilburg University, Center for Economic Research)

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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

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 63.

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Date of creation: 1997
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Handle: RePEc:dgr:kubcen:199763

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

References listed on IDEAS
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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.)

  1. João Ejarque & Ana Balcão Reis, 2003. "More Lessons from Taking an AK Model to the Data," Discussion Papers 03-37, University of Copenhagen. Department of Economics. [Downloadable!]
  2. João Ejarque & Ana Balcão Reis, 2003. "The Poverty of Linear Nations: Lessons from Taking an AK Model to the Data," Discussion Papers 03-06, University of Copenhagen. Department of Economics. [Downloadable!]
  3. P R Agénor, 2005. "Schooling and Public Capital in a Model of Endogenous Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 61, Economics, The Univeristy of Manchester. [Downloadable!]
    Other versions:
  4. 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. [Downloadable!]
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