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Growth and welfare maximization in models of public finance and endogenous growth

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

This paper evaluates the trade-off between growth and welfare maximization from two perspectives. Firstly, it synthesizes and extends endogenous growth models with public finance to compare growth and welfare maximizing tax rates. Secondly, it examines the distinct model outcomes in terms of their growth rates and welfare levels. This comparison highlights the range of trade-offs: the growth maximizing tax rate can be above, below, or equal to the welfare maximizing equivalent. We find however that even relatively large differences in growth and welfare maximizing tax rates translate into relatively small differences in growth rates, and, in some cases, welfare levels.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 11-041.

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Date of creation: 2011
Date of revision:
Handle: RePEc:zbw:zewdip:11041
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  1. Pierre-Richard Agénor, 2005. "Fiscal Policy and Endogenous Growth with Public Infrastructure," The School of Economics Discussion Paper Series 0536, Economics, The University of Manchester.
  2. Turnovsky, Stephen J., 1997. "Fiscal Policy In A Growing Economy With Public Capital," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 615-639, September.
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  4. Li Wenli & Pierre -Daniel Sarte, 2004. "Progressive Taxation and Long-Run Growth," American Economic Review, American Economic Association, vol. 94(5), pages 1705-1716, December.
  5. Ingrid Ott & Stephen J. Turnovsky, 2006. "Excludable and Non-excludable Public Inputs: Consequences for Economic Growth," Economica, London School of Economics and Political Science, vol. 73(292), pages 725-748, November.
  6. 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.
  7. Sugata Ghosh, 2002. "On public investment, long-run growth, and the real exchange rate," Oxford Economic Papers, Oxford University Press, vol. 54(1), pages 72-90, January.
  8. Stephen Turnovsky, 2000. "The Transitional Dynamics of Fiscal Policy: Long-run Capital Accumulation and Growth," Working Papers 0018, University of Washington, Department of Economics.
  9. Turnovsky, Stephen J, 1996. "Fiscal Policy, Adjustment Costs, and Endogenous Growth," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 361-81, July.
  10. Goncalo Monteiro & Stephen J. Turnovsky, 2008. "The composition of productive government expenditure: consequences for economic growth and welfare," Indian Growth and Development Review, Emerald Group Publishing, vol. 1(1), pages 57-83, April.
  11. Willi, Semmlero & Alfred, Greiner & Bobo, Diallo & Anand, Rajaram & Armon, Rezai, 2011. "Fiscal policy, public expenditure composition and growth. theory and empirics," MPRA Paper 35997, University Library of Munich, Germany.
  12. 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).
  13. Pierre-Richard Agénor, 2005. "Health and Infrastructure in Models of Endogenous Growth," The School of Economics Discussion Paper Series 0539, Economics, The University of Manchester.
  14. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August.
  15. Misch, Florian & Gemmell, Norman & Kneller, Richard Anthony, 2011. "Fiscal policy and growth with complementarities and constraints on government," ZEW Discussion Papers 11-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  16. Sugata Ghosh & Udayan Roy, 2004. "Fiscal policy, long-run growth, and welfare in a stock-flow model of public goods," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 742-756, August.
  17. Park, Hyun & Philippopoulos, Apostolis, 2002. "Dynamics Of Taxes, Public Services, And Endogenous Growth," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 187-201, April.
  18. 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.
  19. Tsoukis, Chris & Miller, Nigel J., 2003. "Public services and endogenous growth," Journal of Policy Modeling, Elsevier, vol. 25(3), pages 297-307, April.
  20. Alfred Greiner & Horst Hanusch, 1998. "Growth and Welfare Effects of Fiscal Policy in an Endogenous Growth Model with Public Investment," International Tax and Public Finance, Springer, vol. 5(3), pages 249-261, July.
  21. Lau, Sau-Him Paul, 1995. "Welfare-maximizing vs. growth-maximizing shares of government investment and consumption," Economics Letters, Elsevier, vol. 47(3-4), pages 351-359, March.
  22. 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.
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