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Growth and fiscal policy: a positive theory

Author

Listed:
  • Levon Barseghyan

    (Cornell University)

  • Marco Battaglini

    (Princeton University)

Abstract

We present a political economy theory of growth in which the government affects the growth rate both directly through public investments in infrastructure, and indirectly through the effect of taxation on learning by doing. Policy choices are made by a legislature consisting of representatives elected by geographically defined districts. The legislature can raise revenues via a discretionary income tax and by issuing public debt. We study the equilibrium relationship between the dynamics of debt and the growth rate of the economy. We use the model to study the impact of an austerity program in which a country is forced to reduce the debt/GDP ratio. To quantify these effects, the model is calibrated to the U.S. economy.

Suggested Citation

  • Levon Barseghyan & Marco Battaglini, 2012. "Growth and fiscal policy: a positive theory," Working Papers 1418, Princeton University, Department of Economics, Econometric Research Program..
  • Handle: RePEc:pri:metric:wp041_2012_barseghyan_battaglini.pdf
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    References listed on IDEAS

    as
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    3. Marco Battaglini & Stephen Coate, 2008. "A Dynamic Theory of Public Spending, Taxation, and Debt," American Economic Review, American Economic Association, vol. 98(1), pages 201-236, March.
    4. Fernando Martin, 2009. "A Positive Theory of Government Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 608-631, October.
    5. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    6. Ardagna, Silvia, 2004. "Fiscal Stabilizations: When Do They Work and Why," Scholarly Articles 2580047, Harvard University Department of Economics.
    7. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    8. Rogers, Carol Ann, 1989. " Debt Restructuring with a Public Good," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(1), pages 117-130.
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    11. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
    12. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, pages 573-578.
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    14. Yongsung Chang & Joao F. Gomes & Frank Schorfheide, 2002. "Learning-by-Doing as a Propagation Mechanism," American Economic Review, American Economic Association, pages 1498-1520.
    15. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
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    Cited by:

    1. Henning Bohn, 2013. "Low Altruism, Austerity, and Aversion to Default: Are Countries Converging to the Natural Debt Limit?," CESifo Working Paper Series 4270, CESifo Group Munich.

    More about this item

    Keywords

    GDP; growth rate; public investments; debt; revenue; taxes;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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