Risk, utility-enhancing government expenditure, and the world economy
This paper analyzes the influence of risk and the expenditure policy of the public sector in a two-country stochastic AK growth model where public spending is utility-enhancing. Having characterized the macroeconomic equilibrium first we study the impact of risk and the public sector on consumption-wealth ratio, growth and welfare, given the exogenous size of the public sector. A higher weight of public consumption in the utility function raises the rate of growth due to a fall in the consumption-wealth ratio. Then we show that consumptionwealth ratio and welfare are higher in an open economy than in a closed economy and we study whether open economies grow more than closed economies. Next, the welfare-maximizing size of the public sector is derived and compared it to the size that maximizes growth. We analyze the impact of exogenous parameters, risk specially, on the optimal size. Then we establish that a higher weight of public consumption in the utility function reduces private consumption-wealth ratio leaving the rate of growth unchanged when the size of the public sector is optimally chosen. Finally, we show that more open economies should have a higher size of the public sector under more general conditions than those established in Turnovsky (1999).
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.:
- Barro, Robert J., 1990.
"Government Spending in a Simple Model of Endogeneous Growth,"
3451296, Harvard University Department of Economics.
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- 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).
- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
- Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1627-1644, August.
- John Y. Campbell, 1993.
"Understanding Risk and Return,"
NBER Working Papers
4554, National Bureau of Economic Research, Inc.
- John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
- Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
- Barro, Robert J & Sala-i-Martin, Xavier, 1992.
"Public Finance in Models of Economic Growth,"
Review of Economic Studies,
Wiley Blackwell, vol. 59(4), pages 645-61, October.
- Robert J. Barro & Xavier Sala-i-Martin, 1990. "Public Finance in Models of Economic Growth," NBER Working Papers 3362, National Bureau of Economic Research, Inc.
- Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
- Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers 630, C.E.P.R. Discussion Papers.
- Wacziarg, Romain & Alesina, Alberto, 1998.
"Openness, Country Size and Government,"
4553014, Harvard University Department of Economics.
- Eaton, Jonathan, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 435-45, July.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0412002. 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: (EconWPA)
If references are entirely missing, you can add them using this form.