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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. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
  2. Santos, Manuel S. & Ortigueira, Salvador & Ladrón de Guevara, Antonio, 1994. "Equilibrium dynamics in two-sector models of endogenous growth," UC3M Working papers. Economics 2913, Universidad Carlos III de Madrid. Departamento de Economía.
  3. Ortigueira, Salvador & Santos, Manuel S., 1994. "On convergence in endogenous growth models," UC3M Working papers. Economics 2980, Universidad Carlos III de Madrid. Departamento de Economía.
  4. Chamley, Christophe, 1993. "Externalities and Dynamics in Models of "Learning or Doing."," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 583-609, August.
  5. Razin, Assaf & Yuen, Chi-Wa, 1996. "Capital income taxation and long-run growth: New perspectives," Journal of Public Economics, Elsevier, vol. 59(2), pages 239-263, February.
  6. Casey B. Mulligan & Xavier Sala-i-Martin, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 739-773.
  7. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  8. 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.
  9. B. Douglas Bernheim, 1981. "A Note on Dynamic Tax Incidence," The Quarterly Journal of Economics, Oxford University Press, vol. 96(4), pages 705-723.
  10. 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.
  11. 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.
  12. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  13. King, R.G. & Rebelo, S., 1988. "Public Policy And Economic Growth: Developing Neoclassical Implications," RCER Working Papers 225, University of Rochester - Center for Economic Research (RCER).
  14. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-50, June.
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