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Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare

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  • Donadelli, Michael
  • Grüning, Patrick

Abstract

We study the equilibrium implications of different fiscal policies on macroeconomic quantities and welfare by utilizing an endogenous growth model that matches asset pricing data well. The fiscal instruments of interest are (i) subsidies to R&D expenditure, consumption and capital investment, and (ii) cuts in labor and corporate tax rates. Our equilibrium analysis provides new insights on the interplay of innovation dynamics and fiscal policy. Importantly, we find growth and welfare to be inversely related when changing R&D subsidies. However, this depends on how well the model reproduces asset pricing dynamics. Moreover, only subsidies to capital investments and cuts in the corporate tax rate have the potential to increase both growth and welfare.

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  • Donadelli, Michael & Grüning, Patrick, 2021. "Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
  • Handle: RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000607
    DOI: 10.1016/j.najef.2021.101430
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    More about this item

    Keywords

    Endogenous growth; Fiscal policy; Government subsidies; Tax rates; Welfare; General equilibrium;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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