IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Transitional Dynamics of Fiscal Policy: Long-run Capital Accumulation and Growth

  • Stephen Turnovsky

Recent research in growth theory has established the importance of the non-scale growth model, a key advantage of which is that they are consistent with balanced growth under quite general production structures. Indeed, if the knife-edge restriction that generates traditional endogenous growth models is not imposed, then any stable balanced growth equilibrium is characterized by the absence of scale effects. In this case the long-run equilibrium growth rate is determined by technological parameters and is independent of macro policy instruments.Despite the fact that the equilibrium growth rate is independent of macro policy, fiscal policy remains an important determinant of long-run economic performance. First, fiscal policy has significant effects on the levels of key economic variables, such as the per capita stock of capital and output. Moreover, the non-scale model typically yields slow asymptotic speeds of convergence, consistent with the empirical evidence of 2-3% per annum. This implies that policy changes can affect growth rates for sustained periods of time, so that the accumulated effects of policy changes during the transition from one equilibrium to another may therefore translate to potentially large impacts on steady-state levels. Thus, although the stock of capital grows at the same rates across steady states, the corresponding bases upon which the growth rates compound may be substantially different.These considerations suggest that attention should be directed to determining the impact of fiscal policy on the transitional dynamics. This is the focus of the present paper. The model we employ is of a one-sector economy in which output depends upon the stocks of both private and public capital, as well as endogenously supplied labor. Public capital introduces a positive externality in production, so that the complete production function is one of overall increasing returns to scale in these three productive factors. In addition to accumulating public c

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Our checks indicate that this address may not be valid because: 500 Can't connect to If this is indeed the case, please notify (Michael Goldblatt)

Download Restriction: no

Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2002-22-P.

in new window

Date of creation: Dec 2002
Date of revision:
Publication status: Published in Journal of Money, Credit, and Banking, Volume 36, 2004, 883-910
Handle: RePEc:udb:wpaper:uwec-2002-22-p
Contact details of provider: Postal: Box 353330, Seattle, WA 98193-3330
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Backus, David K. & Kehoe, Patrick J. & Kehoe, Timothy J., 1992. "In search of scale effects in trade and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 377-409, December.
  2. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  3. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
  4. Eric W. Bond & Ping Wang & Chong K. Yip, 1993. "A general two sector model of endogenous growth with human and physical capital," Research Paper 9303, Federal Reserve Bank of Dallas.
  5. Stephen Turnovsky, 1998. "Fiscal Policy, Elastic Labor Supply, and Endogenous Growth," Working Papers 0068, University of Washington, Department of Economics.
  6. Turnovsky, Stephen J., 1996. "Optimal tax, debt, and expenditure policies in a growing economy," Journal of Public Economics, Elsevier, vol. 60(1), pages 21-44, April.
  7. Deaton, Angus, 1981. "Optimal Taxes and the Structure of Preferences," Econometrica, Econometric Society, vol. 49(5), pages 1245-60, September.
  8. Ortigueira, Salvador & Santos, Manuel S, 1997. "On the Speed of Convergence in Endogenous Growth Models," American Economic Review, American Economic Association, vol. 87(3), pages 383-99, June.
  9. repec:tpr:qjecon:v:110:y:1995:i:4:p:1127-70 is not listed on IDEAS
  10. Bond, Eric W. & Wang, Ping & Yip, Chong K., 1996. "A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics," Journal of Economic Theory, Elsevier, vol. 68(1), pages 149-173, January.
  11. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
  12. Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
  13. repec:tpr:qjecon:v:107:y:1992:i:2:p:407-37 is not listed on IDEAS
  14. repec:tpr:qjecon:v:106:y:1991:i:2:p:407-43 is not listed on IDEAS
  15. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
  16. 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.
  17. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  18. Ladron-de-Guevara, Antonio & Ortigueira, Salvador & Santos, Manuel S., 1997. "Equilibrium dynamics in two-sector models of endogenous growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 115-143, January.
  19. Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, December.
    • Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1, December.
  20. Jonathan R. W. Temple, 1998. "Robustness tests of the augmented Solow model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(4), pages 361-375.
  21. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  22. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
  23. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
  24. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-50, June.
  25. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
  26. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  27. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  28. Bernard, Andrew B & Jones, Charles I, 1996. "Technology and Convergence," Economic Journal, Royal Economic Society, vol. 106(437), pages 1037-44, July.
  29. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  30. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  31. Ireland, Peter N., 1994. "Supply-side economics and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 559-571, June.
  32. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
  33. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  34. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  35. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct.
  36. Bruce, Neil & Turnovsky, Stephen J, 1999. "Budget Balance, Welfare, and the Growth Rate: "Dynamic Scoring" of the Long-Run Government Budget," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 162-86, May.
  37. Bernard, Andrew B & Jones, Charles I, 1996. "Comparing Apples to Oranges: Productivity Convergence and Measurement across Industries and Countries," American Economic Review, American Economic Association, vol. 86(5), pages 1216-38, December.
  38. repec:tpr:qjecon:v:110:y:1995:i:2:p:495-525 is not listed on IDEAS
  39. Theo Eicher & Stephen J. Turnovsky, . "Transitional Dynamics in Non-Scale Growth Models," Computing in Economics and Finance 1997 105, Society for Computational Economics.
  40. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:udb:wpaper:uwec-2002-22-p. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael Goldblatt)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.