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Public Spending and Transitional Dynamics of an Innovation-Based Growth Model

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  • Baris Alpaslan

Abstract

This paper extends a three-period Overlapping Generations (OLG) model of endogenous growth where the interactions between public infrastructure, human capital with R&D activities, and growth are studied. The model accounts for the externality of technical knowledge associated with human capital which promotes the innovation capacity in adopting imported technologies and developing new technologies. In order to study the transitional dynamics of the model and to illustrate the impact of public policy, the model is calibrated using average data for low-income countries and sensitivity analysis is reported under different parameter configurations. Based on the numerical analysis for a low-income country, we show that trade-offs in the allocation of public spending may inevitably emerge. However, investment in infrastructure at the expense of spending on R&D is less likely to succeed in promoting growth, whereas it may be more effective to foster economic growth through an offsetting cut in education.

Suggested Citation

  • Baris Alpaslan, 2015. "Public Spending and Transitional Dynamics of an Innovation-Based Growth Model," Centre for Growth and Business Cycle Research Discussion Paper Series 199, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:199
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr199.pdf
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    References listed on IDEAS

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