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Optimal fiscal policy in an emerging economy with credit constraints: theory and application for Poland

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  • Michał Konopczyński

    (Poznań University of Economics)

Abstract

In this paper we develop an open-economy endogenous growth model to examine the influence of fiscal policy on the economy in the long run. We allow for public deficit and 5 types of taxes. One of the novel features is separate treatment of interest rates on public and private debt, both of which are linear functions of appropriate debt-to-GDP ratios. Two extreme situations are analyzed: a model of "decentralized economy", where economic agents do not take into account any externalities, and a model of "benevolent social planner". We derive the rules of optimal fiscal policy that induce economic agents to internalize all externalities. Theoretical results are illustrated with an empirical analysis for Poland. The optimal values of several fiscal policy instruments for Poland are calculated.

Suggested Citation

  • Michał Konopczyński, 2018. "Optimal fiscal policy in an emerging economy with credit constraints: theory and application for Poland," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 10(3), pages 169-231, September.
    • Handle: RePEc:psc:journl:v:10:y:2018:i:3:p:169-231
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    More about this item

    Keywords

    optimal fiscal policy; imperfect capital mobility; credit constraints; production externalities;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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