Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy
We develop an endogenous growth model driven by externalities from both private and public capital. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We compare the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time-consistent equilibrium is sub-optimal in terms of ex-ante intertemporal welfare, it yields higher long-run growth and welfare, through an accumulation of assets by the state and a cut in government consumption. Copyright 2001 by The editors of the Scandinavian Journal of Economics.
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Volume (Year): 103 (2001)
Issue (Month): 2 (June)
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