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Fiscal policy and growth with complementarities and constraints on government

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

Abstract

This paper considers the implications of complementarity in private production and constraints on government for optimal fiscal policy. Using an endogenous growth model with public finance, it derives three central results which modify findings in the literature under standard assumptions. First, it shows that optimal public spending composition and taxation are interrelated so that first- and second-best fiscal policies differ. Second, it shows that the growth-maximizing fiscal policy is affected by preference parameters. Third, it shows that with budget rigidities and informational limitations, knowledge about the optimal fiscal policy parameter values is not necessary for growth-enhancing fiscal policy adjustments.

Suggested Citation

  • Misch, Florian & Gemmell, Norman & Kneller, Richard Anthony, 2011. "Fiscal policy and growth with complementarities and constraints on government," ZEW Discussion Papers 11-018, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:11018
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    References listed on IDEAS

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    1. Florian Misch & Norman Gemmell & Richard Kneller, 2013. "Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(6), pages 939-967, December.
    2. 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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    4. John Creedy, 2010. "Personal Income Tax Structure: Theory and Policy," Chapters, in: Iris Claus & Norman Gemmell & Michelle Harding & David White (ed.), Tax Reform in Open Economies, chapter 7, Edward Elgar Publishing.
    5. Robin Boadway, "undated". "The Role of Second-Best Theory in Public Economics," EPRU Working Paper Series 95-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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    7. 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.
    8. 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.
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    Cited by:

    1. Florian Misch & Norman Gemmell & Richard Kneller, 2013. "Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(6), pages 939-967, December.

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    More about this item

    Keywords

    Imperfect Knowledge; Economic Growth; Productive Public Spending; Optimal Fiscal Policy;
    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
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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