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Government spending and growth in second-best economies

Author

Listed:
  • Bucci, Alberto
  • Florio, Massimo
  • La Torre, Davide

Abstract

This paper extends public spending-based growth theory along three directions: we assume a logistic trajectory for the ratio of government expenditure to aggregate income, self-limiting population change, and exogenous technological progress. By focusing on the choices of a benevolent social planner we find that, if the inverse of the intertemporal elasticity of substitution in consumption is sufficiently high, the ratio of consumption to private physical capital converges towards zero when time goes to infinity. Depending on the form of the underlying aggregate production function and on whether, for given production function, technological progress equals zero or a positive constant, our model may or may not yield an asymptotically balanced growth path (ABGP) equilibrium. When there is no exogenous technological progress, an equilibrium where population size, the ratio of government spending to aggregate income and the ratio of consumption to private physical capital are all constant does exist and the equilibrium is a saddle point. In case of positive technological progress numerical simulations show that the model still exhibits an ABGP equilibrium.

Suggested Citation

  • Bucci, Alberto & Florio, Massimo & La Torre, Davide, 2012. "Government spending and growth in second-best economies," Economic Modelling, Elsevier, vol. 29(3), pages 654-663.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:654-663
    DOI: 10.1016/j.econmod.2011.12.016
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    References listed on IDEAS

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    Cited by:

    1. Chang, Shu-hua & Lai, Ching-chong, 2016. "Vertical separation versus vertical integration in an endogenously growing economy," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 359-380.
    2. Hasnul, Al Gifari, 2015. "The effects of government expenditure on economic growth: the case of Malaysia," MPRA Paper 71254, University Library of Munich, Germany.

    More about this item

    Keywords

    Economic growth; Logistic process; Population change; Government expenditure; Technological progress; Dynamics;

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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