Abstract
The paper presents an endogenous growth model with public capital. However, in contrastto recent studies on economic growth and fiscal policy, we allow for capital market borrowingby the government. Since the behavior by the government (composition of expenditureand borrowing) does not follow optimizing rules, we introduce fiscal regimes (rules) whichdefine the behavior of the government. In strict fiscal regimes, government borrowing isused for public investment. In less strict regimes, it can also be used for debt service andpublic investment. In our model variants, government deficit does not necessarily entail alower growth rate of the economy but the growth effects are different according to whichrules are adopted. Moreover, in our context the growth maximizing income tax rate is differentfrom zero. The model, contingent on the fiscal regime prevailing, can exhibit multipleequilibria and local indeterminacy.
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Greiner, A., Semmler, W. An endogenous growth model with public capitaland government borrowing. Annals of Operations Research 88, 65–79 (1999). https://doi.org/10.1023/A:1018955002563
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DOI: https://doi.org/10.1023/A:1018955002563