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Binding Constraints and Second-Best Strategies in Endogenous Growth Models with Public Finance

Listed author(s):
  • Misch Florian

    (Centre for European Economic Research)

  • Gemmell Norman

    (University of Nottingham and The Treasury, New Zealand)

  • Kneller Richard

    (University of Notingham)

This paper uses an endogenous growth model with public finance to test whether alleviating the most binding constraint to growth corresponds to the optimal fiscal policy adjustment. It makes two contributions: first, it shows that this strategy is optimal if there is only one policy adjustment which alleviates the most binding constraint. When there are several, some of them may in fact reduce growth. The second contribution is therefore to develop a simple guiding principle for this situation: we show that it is likely optimal to adopt the policy adjustment which alleviates the most and worsens the least binding constraint.

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Article provided by De Gruyter in its journal Journal of Globalization and Development.

Volume (Year): 1 (2010)
Issue (Month): 2 (December)
Pages: 1-37

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Handle: RePEc:bpj:globdv:v:1:y:2010:i:2:n:3
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References listed on IDEAS
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  1. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2011. "Growth and welfare maximization in models of public finance and endogenous growth," ZEW Discussion Papers 11-041, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  3. Tsoukis, Chris & Miller, Nigel J., 2003. "Public services and endogenous growth," Journal of Policy Modeling, Elsevier, vol. 25(3), pages 297-307, April.
  4. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
  5. Clague, Christopher K., 1991. "Factor proportions, relative efficiency and developing countries' trade," Journal of Development Economics, Elsevier, vol. 35(2), pages 357-380, April.
  6. 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 607-625, December.
  7. Florian Misch & Norman Gemmell & Richard Kneller, "undated". "Business Perceptions, Fiscal Policy and Growth," Discussion Papers 08/10, University of Nottingham, CREDIT.
  8. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
  9. Tatsuo Hatta, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Oxford University Press, vol. 44(1), pages 1-21.
  10. Hatta, Tatsuo, 1986. "Welfare effects of changing commodity tax rates toward uniformity," Journal of Public Economics, Elsevier, vol. 29(1), pages 99-112, February.
  11. Charles I. Jones, 2008. "Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development," NBER Working Papers 13834, National Bureau of Economic Research, Inc.
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