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Growth Promotion Policies when Taxes cannot be Raised

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  • Katsunori Minami
  • Ryo Horii

Abstract

This paper examines the growth effects of R&D subsidies and public-funded basic research in an R&D-based endogenous growth model under circumstances where the government cannot raise taxes. We show that if individuals have enough life-cycle saving motives and R&D productivity is sufficiently high, g>r holds in equilibrium, and the government can finance the required expenses while perpetually rolling over the debt. Whenever possible, debt-financed R&D subsidies always enhance short-run growth. However, long-term growth is promoted only when the initial g-r gap is wide enough. Even when the long-term effect is negative, the economy may benefit from the increased GDP during a long transition to the new BGP. We confirmed that the social return to R&D is always higher than the growth rate despite g>r. In an extended model, we examine the effect of enhancing public-funded basic research and find that it is particularly effective for low-growth economies.
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Suggested Citation

  • Katsunori Minami & Ryo Horii, 2024. "Growth Promotion Policies when Taxes cannot be Raised," ISER Discussion Paper 1258, Institute of Social and Economic Research, The University of Osaka.
  • Handle: RePEc:dpr:wpaper:1258
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    References listed on IDEAS

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    1. Nicholas Bloom & John Van Reenen & Heidi Williams, 2019. "A toolkit of policies to promote innovation," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 10.
    2. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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