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 â€œnon-scaleâ€ production model in which there are two types of firms, conventional profit-maximizing private firms, and â€œpublic firmsâ€, whose objective is to produce a specified quantity of government investment goods â€“ determined by government policy â€“ 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 InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 55.
Date of creation: 21 Jul 2004
Date of revision:
public capital; non scale growth model; fiscal policy; congestion;
Other versions of this item:
- Mihaela Pintea, 2004. "Fiscal Policy in a Two-Sector Economy with Public Capital and Congestion," Working Papers 0402, Florida International University, Department of Economics.
- 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-2004-08-02 (All new papers)
- NEP-DGE-2004-08-02 (Dynamic General Equilibrium)
- NEP-MAC-2004-08-02 (Macroeconomics)
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