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A Neoclassical Growth Model with Public Spending

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Abstract

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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  • OA Carboni & G Medda, 2010. "A Neoclassical Growth Model with Public Spending," Working Paper CRENoS 201033, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201033
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    1. Atolia, Manoj & Chatterjee, Santanu & Turnovsky, Stephen J., 2010. "How misleading is linearization? Evaluating the dynamics of the neoclassical growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1550-1571, September.
    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.
    3. Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 1(3), pages 615-639, September.
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    1. repec:rnp:ppaper:nvg143 is not listed on IDEAS
    2. Shagas, Natalia (Шагас, Наталья) & Bojechkova, A.V. (Божечкова, А.В.) & Perevyshin, Y.N. (Перевышин, Ю.Н.) & Perevyshina, E.A. (Перевышина, Е.А.), 2016. "Modeling of State Influence on the Processes of Economic Growth [Моделирование Воздействия Государства На Процессы Экономического Роста]," Working Papers 2132, Russian Presidential Academy of National Economy and Public Administration.

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    Keywords

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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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