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Fiscal Policy in a Two-Sector Economy with Public Capital and Congestion

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  • Mihaela Pintea

Abstract

This 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 “non-scale†production model in which there are two types of firms, conventional profit-maximizing private firms, and “public firmsâ€, whose objective is to produce a specified quantity of government investment goods – determined by government policy – at minimum cost. 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 Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 55.

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Date of creation: 21 Jul 2004
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Handle: RePEc:sce:scecf4:55

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Keywords: public capital; non scale growth model; fiscal policy; congestion;

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  1. 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.
  2. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  3. Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
  4. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  5. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  6. 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.
  7. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September.
  8. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
  9. 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.
  10. 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.
  11. Sergio T. Rebelo, 1992. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. repec:cup:macdyn:v:1:y:1997:i:3:p:615-39 is not listed on IDEAS
  17. Theo Eicher & Stephen J. Turnovsky, . "Transitional Dynamics in Non-Scale Growth Models," Computing in Economics and Finance 1997 105, Society for Computational Economics.
  18. 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.
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