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Growth and fiscal policy: a positive theory

Author

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  • Levon Barseghyan

    (Cornell University)

  • Marco Battaglini

    (Princeton University)

Abstract

We present a political economy theory of growth in which the government affects the growth rate both directly through public investments in infrastructure, and indirectly through the effect of taxation on learning by doing. Policy choices are made by a legislature consisting of representatives elected by geographically defined districts. The legislature can raise revenues via a discretionary income tax and by issuing public debt. We study the equilibrium relationship between the dynamics of debt and the growth rate of the economy. We use the model to study the impact of an austerity program in which a country is forced to reduce the debt/GDP ratio. To quantify these effects, the model is calibrated to the U.S. economy.

Suggested Citation

  • Levon Barseghyan & Marco Battaglini, 2012. "Growth and fiscal policy: a positive theory," Working Papers 1418, Princeton University, Department of Economics, Econometric Research Program..
    • Handle: RePEc:pri:metric:wp041_2012_barseghyan_battaglini.pdf
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    References listed on IDEAS

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    Cited by:

    1. Fernando M. Martin, 2016. "The Value of Constraints on Discretionary Government Policy," Working Papers 2016-19, Federal Reserve Bank of St. Louis.
    2. Henning Bohn, 2013. "Low Altruism, Austerity, and Aversion to Default: Are Countries Converging to the Natural Debt Limit?," CESifo Working Paper Series 4270, CESifo.
    3. ,, 2014. "A dynamic theory of electoral competition," Theoretical Economics, Econometric Society, vol. 9(2), May.

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    More about this item

    Keywords

    GDP; growth rate; public investments; debt; revenue; taxes;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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