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A Neoclassical Growth Model with Public Spending

This paper analyses the effect of public expenditures in the context of a modified Solow model of capital accumulation with optimising agents. The model identifies optimal government size and optimal composition of public expenditures which maximize the rate of growth in the dynamics to the steady state and maximize the long run level of per capita income. Different allocations of public resources lead to different growth rates in the transitional dynamics depending on their elasticity. However effects from fiscal policy are only temporary and disappear in the steady state. Finally we argue that neglecting the non- linear nature of the relationship between government spending and growth may lead empirical studies to biased results.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201033.

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Date of creation: 2010
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Handle: RePEc:cns:cnscwp:201033
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  1. Manoj Atolia & Santanu Chatterjee & Stephen J. Turnovsky, 2008. "How Misleading is Linearization? Evaluating the Dynamics of the Neoclassical Growth Model," Working Papers wp2008_11_01, Department of Economics, Florida State University, revised Sep 2008.
  2. Bajo-Rubio, Oscar, 2000. "A further generalization of the Solow growth model: the role of the public sector," Economics Letters, Elsevier, vol. 68(1), pages 79-84, July.
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