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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.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/3136
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Paper provided by Victoria University of Wellington, Chair in Public Finance in its series Working Paper Series with number 3136.

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Date of creation: 2014
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Handle: RePEc:vuw:vuwcpf:3136
Contact details of provider: Postal: School of Accounting & Commercial Law, Victoria University of Wellington, PO Box 600, Wellington, New Zealand
Phone: +64 (4) 463 5775
Fax: +64 (4) 463 5076
Web page: http://www.victoria.ac.nz/sacl/about/chair-in-public-finance
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  1. 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.
  2. John Creedy, 2009. "The Personal Income Tax Structure: Theory and Policy," Department of Economics - Working Papers Series 1063, The University of Melbourne.
  3. Norman Gemmell & Florian Misch & Blanca Moreno-Dodson, 2012. "Public Spending for Long-Run Growth : A Practitioners' View," World Bank Other Operational Studies 17061, The World Bank.
  4. Christopher Heady & Åsa Johansson & Jens Arnold & Bert Brys & Laura Vartia, 2009. "Tax Policy for Economic Recovery and Growth," Studies in Economics 0925, School of Economics, University of Kent.
  5. Cecilia Garcia-Penalosa & Stephen Turnovsky, 2004. "Second-Best Optimal Taxation of Capital and Labor in a Developing Economy," Working Papers UWEC-2004-05-P, University of Washington, Department of Economics, revised Apr 2004.
  6. Santiago Acosta Ormaechea & Jiae Yoo, 2012. "Tax Composition and Growth; A Broad Cross-Country Perspective," IMF Working Papers 12/257, International Monetary Fund.
  7. 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.
  8. 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.
  9. Todd D. Mattina & Victoria Gunnarsson, 2007. "Budget Rigidity and Expenditure Efficiency in Slovenia," IMF Working Papers 07/131, International Monetary Fund.
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