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Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare

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  • Michael Donadelli

    (Faculty of Economics and Business Administration and Research Center SAFE, Goethe University Frankfurt)

  • Patrick Gruning

    (Bank of Lithuania & Faculty of Economics, Vilnius University)

Abstract

We study the general equilibrium implications of different fiscal policies on macroeconomic quantities, asset prices, and welfare by utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: "incremental" innovations by incumbents and "radical" innovations by entrants. The government levies taxes on labor income and corporate profits and supplies subsidies to consumption, capital investment, and investments in research and development by entrants and, if applicable, incumbents. With these models at hand, we provide new insights on the interplay of innovation dynamics and fiscal policy.

Suggested Citation

  • Michael Donadelli & Patrick Gruning, 2017. "Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare," Bank of Lithuania Working Paper Series 43, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:43
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    More about this item

    Keywords

    Endogenous growth; Asset pricing; Government; Fiscal policy; Heterogeneous innovation;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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