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Productive government spending and its consequences for the growth–inequality tradeoff

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  • Getachew, Yoseph Y.
  • Turnovsky, Stephen J.

Abstract

This paper investigates the effects of productive government spending on the relationship between growth and inequality in an economy subject to idiosyncratic production shocks and heterogeneous endowments. Assuming lognormal distributions, we derive tractable closed form solutions describing the equilibrium dynamics. We show how the effect of government investment on the equilibrium dynamics of both inequality and growth depends crucially upon the elasticity of substitution between public and private capital in production. This has important consequences for the growth- and welfare-maximizing rates of government investment. Finally, we supplement our theoretical analysis with numerical simulations, calibrated to approximate the productive characteristics of a real world economy. With the empirical evidence strongly supporting the complementarity between public and private capital, our simulations suggest that conclusions based on the commonly employed Cobb–Douglas production function may be seriously misleading.

Suggested Citation

  • Getachew, Yoseph Y. & Turnovsky, Stephen J., 2015. "Productive government spending and its consequences for the growth–inequality tradeoff," Research in Economics, Elsevier, vol. 69(4), pages 621-640.
  • Handle: RePEc:eee:reecon:v:69:y:2015:i:4:p:621-640
    DOI: 10.1016/j.rie.2015.09.001
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    Cited by:

    1. Chetan Ghate & Gerhard Glomm & Jialu Liu Streeter, 2016. "Sectoral Infrastructure Investments in an Unbalanced Growing Economy: The Case of Potential Growth in India," Asian Development Review, MIT Press, vol. 33(2), pages 144-166, September.
    2. Getachew, Yoseph Yilma, 2016. "Credit constraints, growth and inequality dynamics," Economic Modelling, Elsevier, vol. 54(C), pages 364-376.
    3. Parantap Basu & Yoseph Getachew, 2020. "Redistributive innovation policy, inequality, and efficiency," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(3), pages 532-554, June.
    4. John Gibson & Felix Rioja, 2017. "Public Infrastructure Maintenance And The Distribution Of Wealth," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 175-186, January.
    5. Ales Marsal & Lorant Kaszab & Roman Horvath, 2017. "Government Spending and the Term Structure of Interest Rates in a DSGE Model," Working and Discussion Papers WP 3/2017, Research Department, National Bank of Slovakia.
    6. Turnovsky, Stephen J., 2015. "Economic growth and inequality: The role of public investment," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 204-221.
    7. Getachew, Yoseph Y. & Turnovsky, Stephen J., 2020. "Redistribution, inequality, and efficiency with credit constraints: Implications for South Africa," Economic Modelling, Elsevier, vol. 93(C), pages 259-277.
    8. Erauskin, Iñaki & Turnovsky, Stephen J., 2020. "Financial globalization and its consequences for productive government expenditure," Journal of Macroeconomics, Elsevier, vol. 66(C).
    9. Aiyar, Shekhar & Ebeke, Christian, 2020. "Inequality of opportunity, inequality of income and economic growth," World Development, Elsevier, vol. 136(C).
    10. Chang Cheng-Wei & Lai Ching-Chong, 2017. "Macroeconomic (in)stability and endogenous market structure with productive government expenditure," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(2), pages 1-16, April.

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    More about this item

    Keywords

    Government investment; Idiosyncratic shocks; Growth; Inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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