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Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy

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  • Thomas Krichel
  • Paul Levine

Abstract

We develop an endogenous growth model driven by externalities from both private and public capital. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We compare the optimal and time‐consistent policies in a linear‐quadratic approximation of the model. Although the time‐consistent equilibrium is sub‐optimal in terms of ex‐ante intertemporal welfare, it yields higher long‐run growth and welfare, through an accumulation of assets by the state and a cut in government consumption.

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  • Thomas Krichel & Paul Levine, 2001. "Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(2), pages 295-316, June.
    • Handle: RePEc:bla:scandj:v:103:y:2001:i:2:p:295-316
    DOI: 10.1111/1467-9442.00246
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    Cited by:

    1. Fedderke, J.W. & Bogetic, Z., 2009. "Infrastructure and Growth in South Africa: Direct and Indirect Productivity Impacts of 19 Infrastructure Measures," World Development, Elsevier, vol. 37(9), pages 1522-1539, September.
    2. Evan Osborne, 2006. "The Sources Of Growth At Different Stages Of Development," Contemporary Economic Policy, Western Economic Association International, vol. 24(4), pages 536-547, October.

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