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Fiscal Policy and Fluctuations in a Monetary Model of Growth

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  • Stefano Bosi

    (EPEE, University of Evry)

  • Francesco Magris

    (EPEE, University of Evry)

Abstract

We consider an infinite horizon economy with representative agent, aggregate externalities on capital/labor ratio and liquidity constraint on income taxes. We show that the stationary rate of growth can be indeterminate for a wide range of elasticities of intertemporal substitution in consumption. Such a range is bounded from below by a value undergoing a saddle node bifurcation and from above by a value giving raise to a flip bifurcation. It follows that both multiple stationary rates of growth and cycles may emerge. In addition, we carry out a welfare analysis in terms of the optimal level of taxation, since public spending affects consumer utility, although in a separable way.

Suggested Citation

  • Stefano Bosi & Francesco Magris, 2005. "Fiscal Policy and Fluctuations in a Monetary Model of Growth," Documents de recherche 05-02, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:05-02
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Robert J. Barro & Paul Romer, 1993. "Economic Growth (1992)," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, March.
    3. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    4. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    5. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
    6. Fabrice Gilles, 2004. "An Attempt to Evaluate the Impact of Reorganization on the Way Working Time Reduction Has Been Implemented by French Firms since 1996," Documents de recherche 04-19, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    7. 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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