Fiscal Policy in a Two-Sector Economy with Public Capital and Congestion
AbstractThis paper focuses on the role of government capital as a critical productive input when the level of services that the agent derives from it is subject to congestion. I develop a two-sector “nonscale” production model in which there are two types of firms, conventional profit-maximizing private firms, and “public firms”, whose objective is to produce a specified quantity of government investment goods – determined by government policy – at minimum cost. Furthermore, the production functions of the two sectors need not in general coincide. Using this two-sector production set-up I assume that the positive externality of the public capital is associated with two types of congestion, proportional and aggregate. A variety of fiscal disturbances are analyzed. Because of the complexity of the model the analysis is carried out using simulations of a calibrated economy. The effects of tax policies are remarkably robust with respect to the relative capital intensities of the two productive sectors. In contrast, the effects of government investment are much more sensitive to this aspect. The introduction of congestion decreases the steady state growth rate of the economy. The relative congestion has stronger effects when the variation in the government investment is analyzed, whereas the absolute congestion is more relevant in the analysis of the change in the tax on capital income. The papers highlight the intertemporal dimensions of fiscal policy and the tradeoffs these involve for economic performance, especially growth and welfare.
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Bibliographic InfoPaper provided by Florida International University, Department of Economics in its series Working Papers with number 0402.
Length: 35 pages
Date of creation: Jan 2004
Date of revision:
endogenous growth; fiscal policy; public capital; congestion;
Other versions of this item:
- Mihaela Pintea, 2004. "Fiscal Policy in a Two-Sector Economy with Public Capital and Congestion," Computing in Economics and Finance 2004 55, Society for Computational Economics.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-08-13 (All new papers)
- NEP-MAC-2005-08-13 (Macroeconomics)
- NEP-URE-2005-08-13 (Urban & Real Estate Economics)
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