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Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy

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  • Krichel, Thomas
  • Levine, Paul

Abstract

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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  • Krichel, Thomas & Levine, Paul, 2001. " Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(2), pages 295-316, June.
  • Handle: RePEc:bla:scandj:v:103:y:2001:i:2:p:295-316
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    Cited by:

    1. Fedderke, J.W. & Bogetic, Z., 2009. "Infrastructure and Growth in South Africa: Direct and Indirect Productivity Impacts of 19 Infrastructure Measures," World Development, Elsevier, vol. 37(9), pages 1522-1539, September.

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