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Complementarity in Models of Public Finance and Endogenous Growth


  • Misch, Florian
  • Gemmell, Norman
  • Kneller, Richard


This paper considers the effects of complementarity in private production between private and public inputs on optimal fiscal policy under the objective of growth maximization. Using an endogenous growth model with public finance and CES technology, it derives two central results. First, it shows that with complementarity, growth-maximizing fiscal policy is also affected by preference parameters, the degree of complementarity and the stock-flow properties of public inputs to private production. Second, it shows that optimal public spending composition and taxation are interrelated and also depend on the efficiency of public spending under growth maximization. Both results contrast with standard findings in the literature that are typically based on the assumption of Cobb-Douglas technology, and have important lessons for policy settings.

Suggested Citation

  • Misch, Florian & Gemmell, Norman & Kneller, Richard, 2014. "Complementarity in Models of Public Finance and Endogenous Growth," Working Paper Series 3136, Victoria University of Wellington, Chair in Public Finance.
  • Handle: RePEc:vuw:vuwcpf:3136

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    References listed on IDEAS

    1. Garcia Penalosa, Cecilia & Turnovsky, Stephen J., 2005. "Second-best optimal taxation of capital and labor in a developing economy," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1045-1074, June.
    2. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    3. 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 607-625, December.
    4. Jens Matthias Arnold & Bert Brys & Christopher Heady & Åsa Johansson & Cyrille Schwellnus & Laura Vartia, 2011. "Tax Policy for Economic Recovery and Growth," Economic Journal, Royal Economic Society, vol. 121(550), pages 59-80, February.
    5. Norman Gemmell & Florian Misch & Blanca Moreno-Dodson, 2012. "Public Spending for Long-Run Growth: A Practitioners’ View," World Bank - Economic Premise, The World Bank, issue 99, pages 1-4, December.
    6. Sugata Ghosh & Andros Gregoriou, 2008. "The composition of government spending and growth: is current or capital spending better?," Oxford Economic Papers, Oxford University Press, vol. 60(3), pages 484-516, July.
    7. John Creedy, 2009. "The Personal Income Tax Structure: Theory and Policy," Department of Economics - Working Papers Series 1063, The University of Melbourne.
    8. Todd D. Mattina & Victoria Gunnarsson, 2007. "Budget Rigidity and Expenditure Efficiency in Slovenia," IMF Working Papers 07/131, International Monetary Fund.
    9. Santiago Acosta Ormaechea & Jiae Yoo, 2012. "Tax Composition and Growth; A Broad Cross-Country Perspective," IMF Working Papers 12/257, International Monetary Fund.
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    Complementarity; Economic growth; Productive public spending; Optimal fiscal policy;

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