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Fiscal Policy in an Endogenous Growth Model with Human Capital Accumulation

  • Salvador Ortigueira

    ()

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

In this paper we present an endogenous growth model with physical and human capital accumulation and study the effects of labor and capital income taxation on the transitional dynamics to the balanced path. Our results amount to an extension of those in Caball\'{e} and Santos (1993) and offer conditions on the parameters in the model to characterize the three growth cases (normal growth, exogenous growth and paradoxical growth). We show that parameters on preferences, technologies and depreciation rates, as well as fiscal policy parameters, are relevant to determine qualitatively the dynamic behavior of the economy. We also offer a measure of the inefficiency derived from the taxation of capital earnings. The associated welfare cost is closely related to the short-run behavior of human capital investment, which characterizes the three possible growth cases.

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Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 9609.

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Length: 34 pages
Date of creation: Apr 1996
Date of revision:
Handle: RePEc:cie:wpaper:9609
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  1. Christophe Chamley, 1991. "Externalities and Dynamics in Models of "Learning or Doing"," Boston University - Institute for Economic Development 17, Boston University, Institute for Economic Development.
  2. Christophe Chamley, 1980. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Cowles Foundation Discussion Papers 553, Cowles Foundation for Research in Economics, Yale University.
  3. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  4. Antonio Ladron de Guevara & Salvador Ortigueira & Manuel S. Santos, 1994. "Equilibrium Dynamics in Two-Sector Models of Endogenous Growth," Working Papers 9403, Centro de Investigacion Economica, ITAM.
  5. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
  6. Salvador Ortigueira & Manuel Santos, 1996. "On convergence in endogenous growth models," Discussion Paper / Institute for Empirical Macroeconomics 110, Federal Reserve Bank of Minneapolis.
  7. Faig, Miquel, 1995. "A simple economy with human capital: Transitional dynamics, technology shocks, and fiscal policies," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 421-446.
  8. Mulligan, C.B. & Sala-i-Martin, X., 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," Papers 651, Yale - Economic Growth Center.
  9. Assaf Razin & Chi-Wa Yuen, 1995. "Capital Income Taxation and Long Run Growth: New Perspectives," NBER Working Papers 5028, National Bureau of Economic Research, Inc.
  10. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S126-50, October.
  11. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  12. Caballe, Jordi & Santos, Manuel S, 1993. "On Endogenous Growth with Physical and Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1042-67, December.
  13. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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