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Fiscal Policy in a Stochastic Model of Endogenous Growth

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  • Canton, E.J.F.

Abstract

It is nowadays widely believed that public schooling may contribute favourably to long-term economic growth. The income tax rates that are needed to finance government spending typically show an erratic time pattern. Such tax randomness could increase the intensity of the business cycle. Thus, government spending on education may spur economic growth, but the other side of the coin is that this is likely to increase the intensity of cyclical fluctuations. These issues are discussed in the context of a stochastic endogenous growth model with learning-by-doing as well as schooling activity. The key results are: (i) income taxation may go hand in hand with increased economic growth under certain conditions, (ii) tax randomness is responsible for a modest fraction of cyclical variability, (iii) the inclusion of stochastic taxation brings the model closer to the U.S. business cycle experience, (iv) the employment variability puzzle can be solved by introducing stochastic discounting, (v) the latter model can successfully pass a Wald-test, (vi) the interaction between long-term economic growth and the business cycle can be positive as well as negative, and (vii) the model typically suggests that capital taxes stabilize the economy.

Suggested Citation

  • Canton, E.J.F., 1997. "Fiscal Policy in a Stochastic Model of Endogenous Growth," Discussion Paper 1997-63, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:3c1fffeb-2496-4f9b-9bf3-725210e60e05
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    References listed on IDEAS

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    Cited by:

    1. Canton, Erik, 2001. "Fiscal policy in a stochastic model of endogenous growth," Economic Modelling, Elsevier, vol. 18(1), pages 19-47, January.

    More about this item

    Keywords

    Fiscal policy; economic growth; business cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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