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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
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)
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.:
- Ogaki, M & Reinhart, C-M, 1995.
"Measuring Intertemporal Substitution : The Role of Durable Goods,"
RCER Working Papers
404, University of Rochester - Center for Economic Research (RCER).
- Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
- Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
- Edwards, John H. Y., 1990. "Congestion function specification and the "publicness" of local public goods," Journal of Urban Economics, Elsevier, vol. 27(1), pages 80-96, January.
- Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
- Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
- Theo S Eicher & Stephen Turnovsky, 1998.
"Scale, Congestion, and Growth,"
Discussion Papers in Economics at the University of Washington
0071, Department of Economics at the University of Washington.
- repec:cup:macdyn:v:1:y:1997:i:3:p:615-39 is not listed on IDEAS
- Rebelo, Sergio, 1991.
"Long-Run Policy Analysis and Long-Run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 99(3), pages 500-521, June.
- Michael B. Devereux & David R. F. Love, 1994. "The Effects of Factor Taxation in a Two-Sector Model of Endogenous Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 509-36, August.
- Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September.
- Barro, Robert J, 1991.
"Economic Growth in a Cross Section of Countries,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(2), pages 407-43, May.
- Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
- Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
- David Aschauer, 1988.
"Is public expenditure productive?,"
88-7, Federal Reserve Bank of Chicago.
- Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
- Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
- Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 615-639, September.
- Baxter, Marianne & King, Robert G, 1993.
"Fiscal Policy in General Equilibrium,"
American Economic Review,
American Economic Association, vol. 83(3), pages 315-34, June.
- Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
- Theo Eicher & Stephen J. Turnovsky, . "Transitional Dynamics in Non-Scale Growth Models," Computing in Economics and Finance 1997 105, Society for Computational Economics.
- Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sheng Guo).
If references are entirely missing, you can add them using this form.