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Dynamic fiscal policies and unemployment in a simple endogenous growth model


  • Stefan Josten



This paper analyzes the growth and employment effects of dynamic fiscal policies in an overlapping generations model with endogenous growth and imperfect labour markets. With balanced-budget policies, the modelled closed economy grows at a constant rate which is higher, the lower are the labour tax rate and the unemployment rate. Constant-flow budget policies are not feasible, while government Ponzi games are feasible only if economic agents have implausibly high savings rates. Furthermore, while constant-stock fiscal policies are sustainable, an increase in the debt-to-capital ratio is accompanied by higher taxes, a rise in unemployment and lower economic growth. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • Stefan Josten, 2006. "Dynamic fiscal policies and unemployment in a simple endogenous growth model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(6), pages 701-716, November.
  • Handle: RePEc:kap:itaxpf:v:13:y:2006:i:6:p:701-716
    DOI: 10.1007/s10797-006-6603-5

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    References listed on IDEAS

    1. Basu, Susanto & Fernald, John G., 1995. "Are apparent productive spillovers a figment of specification error?," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 165-188, August.
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    3. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
    4. Philippe Aghion & Peter Howitt, 1994. "Growth and Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 477-494.
    5. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
    6. Fabio Arico, 2003. "Growth and Unemployment: Towards a Theoretical Integration," Journal of Economic Surveys, Wiley Blackwell, vol. 17(3), pages 419-455, July.
    7. O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-450, August.
    8. Bean, Charles & Pissarides, Christopher, 1993. "Unemployment, consumption and growth," European Economic Review, Elsevier, vol. 37(4), pages 837-854, May.
    9. Cahuc, Pierre & Michel, Philippe, 1996. "Minimum wage unemployment and growth," European Economic Review, Elsevier, vol. 40(7), pages 1463-1482, August.
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    Cited by:

    1. Tetsuo Ono, 2014. "Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis," Discussion Papers in Economics and Business 14-30-Rev., Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Sep 2015.
    2. Luciano Fanti & Luca Gori, 2011. "On economic growth and minimum wages," Journal of Economics, Springer, vol. 103(1), pages 59-82, May.
    3. Luciano Fanti & Luca Gori, 2010. "Economic Growth and Welfare in a Neoclassical Overlapping Generations Growth Model with Minimum Wages and Consumption Taxes," LABOUR, CEIS, vol. 24(3), pages 238-262, September.
    4. Debi Prasad Bal & Badri Narayan Rath, 2016. "Is Public Debt a Burden for India?," Economic Papers, The Economic Society of Australia, vol. 35(2), pages 184-201, June.
    5. Yakita, Akira, 2014. "Involuntary unemployment and sustainability of bond-financed fiscal deficit," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 79-93.


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