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The Dynamic Effects of Government Spending Policies in a Two-Sector Endogenous Growth Model

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  • Devereux, Michael B
  • Love, David R F

Abstract

This paper investigates the impact of government spending policies in a two sector model of endogenous growth. Endogenous growth arises because all factors of production - physical and human capital, are reproducible. Both temporary and permanent government spending shocks are examined. The model implies that a permanent, lump-sum financed, increase in government spending raises the long-run growth rate. This occurs because the negative wealth effects of a spending increase will increase labor supply. On the other hand, an income-tax (or wage-tax) financed rise in government spending reduces the growth rate. The output effects of a temporary increase in government spending may be greater or less than a permanent increase in spending. Copyright 1995 by Ohio State University Press.

Suggested Citation

  • Devereux, Michael B & Love, David R F, 1995. "The Dynamic Effects of Government Spending Policies in a Two-Sector Endogenous Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 232-256, February.
  • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:232-56
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    Cited by:

    1. Sigitas Karpavicius, 2009. "The Effects of Fiscal Instruments on the Economy of Lithuania," Bank of Lithuania Working Paper Series 4, Bank of Lithuania.
    2. Woon Gyu Choi & Michael B. Devereux, 2006. "Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-8.
    3. C.E. Weber, 2000. "Government Purchases, Government Transfers, and the Post-1970 Slowdown In U.S. Economic Growth," Contemporary Economic Policy, Western Economic Association International, vol. 18(1), pages 107-123, January.
    4. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
    5. Norman Gemmell & Richard Kneller & Ismael Sanz, 2014. "The growth effects of tax rates in the OECD," Canadian Journal of Economics, Canadian Economics Association, vol. 47(4), pages 1217-1255, November.
    6. Kazuo Mino, 2016. "Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity," The Japanese Economic Review, Japanese Economic Association, vol. 67(1), pages 3-30, March.
    7. Gemmell, Norman, 2001. "Fiscal Policy in a Growth Framework," WIDER Working Paper Series 084, World Institute for Development Economic Research (UNU-WIDER).
    8. Ching-chong Lai & Jhy-yuan Shieh & Wen-Ya Chang, 2002. "Endogenous Growth and Defense Expenditures: A New Explanation of the Benoit Hypothesis," Defence and Peace Economics, Taylor & Francis Journals, vol. 13(3), pages 179-186.
    9. Wen-Ya Chang & Ying-An Chen & Ming-Ruey Kao, 2008. "Social Status, Education And Government Spending In A Two-Sector Model Of Endogenous Growth," The Japanese Economic Review, Japanese Economic Association, vol. 59(1), pages 99-112.
    10. Gian Maria Milesi-Ferrett & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," NBER Working Papers 5317, National Bureau of Economic Research, Inc.
    11. Shieh, Jhy-yuan & Chen, Jhy-hwa & Chang, Shu-hua & Lai, Ching-chong, 2014. "Environmental consciousness, economic growth, and macroeconomic instability," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 151-160.
    12. Xavier Raurich, 2001. "Indeterminancy and Government Spending in a Two-Sector Model of Endogenous Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 210-229, January.
    13. Xin Long & Robert Waldmann & Alessandra Pelloni, 2008. "Lump-Sum Taxes in a R&D Model," Working Paper series 35_08, Rimini Centre for Economic Analysis.
    14. John Creedy & Norman Gemmell, 2002. "Publicly Financed Education in an Endogenous Growth Model," Treasury Working Paper Series 02/24, New Zealand Treasury.
    15. Minea, Alexandru, 2008. "The Role of Public Spending in the Growth Theory Evolution," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 5(2), pages 99-120, June.
    16. Thomas Krichel & Paul Levine, 1996. "Dynamic Aspect of Growth and Fiscal Policy," School of Economics Discussion Papers 9601, School of Economics, University of Surrey, revised Nov 1997.
    17. Price V. Fishback & Valentina Kachanovskaya, 2010. "In Search of the Multiplier for Federal Spending in the States During the Great Depression," NBER Working Papers 16561, National Bureau of Economic Research, Inc.
    18. Groneck, Max, 2008. "A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-7, University of Cologne, FiFo Institute for Public Economics.
    19. Maria Carme Riera i Prunera, 2003. "Deficit, human capital and economic growth dynamics," Working Papers in Economics 102, Universitat de Barcelona. Espai de Recerca en Economia.
    20. Jhy-hwa Chen & Ching-chong Lai & Jhy-yuan Shieh, 2003. "Anticipated Environmental Policy and Transitional Dynamics in an Endogenous Growth Model," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(2), pages 233-254, June.

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