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

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  • Misch Florian
  • Gemmell Norman
  • Kneller Richard

Abstract

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.

Suggested Citation

  • Misch Florian & Gemmell Norman & Kneller Richard, 2010. "Binding Constraints and Second-Best Strategies in Endogenous Growth Models with Public Finance," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-37, December.
    • Handle: RePEc:bpj:globdv:v:1:y:2010:i:2:n:3
    DOI: 10.2202/1948-1837.1068
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    References listed on IDEAS

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    1. Florian Misch & Norman Gemmell & Richard Kneller, 2013. "Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(6), pages 939-967, December.
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    2. Dragan TEVDOVSKI & Vladimir FILIPOVSKI & Igor IVANOVSKI, 2014. "A Diagnostics Approach To Economic Growth In Small Open Economies: The Case Of The Republic Of Macedonia," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 13, pages 47-68, June.

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