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The macroeconomic effects of fiscal policy in a stochastically growing economy

  • Tamai, Toshiki

This paper develops a stochastic model of endogenous growth with productive government expenditure. Herein, we specify the CES production function according to recent empirical evidence. The elasticity of substitution plays a key role in determining macroeconomic performance and the effectiveness of fiscal policy under uncertainty. Results demonstrate that a large elasticity of substitution provides a large expected growth rate and also large volatility of the growth rate. Regarding these effects, the growth-maximizing tax rate and welfare-maximizing tax rate under uncertainty are larger or smaller than those of deterministic economy according to the elasticity of substitution.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 35 (2013)
Issue (Month): C ()
Pages: 464-471

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Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:464-471
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Andreas Irmen & Johanna Kuehnel, 2009. "Productive Government Expenditure And Economic Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 692-733, 09.
  2. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September.
  3. Brunetti, Aymo, 1998. "Policy volatility and economic growth: A comparative, empirical analysis," European Journal of Political Economy, Elsevier, vol. 14(1), pages 35-52, February.
  4. Stephen Turnovsky, 1998. "Productive Government Expenditure in a Stochastically Growing Economy," Working Papers 0056, University of Washington, Department of Economics.
  5. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  6. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
  7. Ingrid Ott & Susanne Soretz, 2004. "Growth and Welfare Effects of Tax Cuts: The Case of a Productive Public Input with Technological Risk," Economic Change and Restructuring, Springer, vol. 31(2), pages 117-135, June.
  8. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
  9. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, June.
  10. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
  11. Miguel A. Le�n-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-57, September.
  12. repec:cup:cbooks:9780521834063 is not listed on IDEAS
  13. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  14. Alicia H. Munnell, 1992. "Policy Watch: Infrastructure Investment and Economic Growth," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 189-198, Fall.
  15. Clemens, Christiane & Soretz, Susanne, 2004. "Optimal fiscal policy, uncertainty, and growth," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 679-697, December.
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