Edited by Neri Salvadori and Renato Balducci
Chapter 10: Fiscal policy and economic growth
* Renato Balducci 10.1. INTRODUCTION New Growth Theory1 has sought to recover – within the framework of the rational and optimizing behaviour of agents – the scope for allocative intervention by the policy-maker that was undervalued or indeed denied by the previous neoclassical theory of growth.2 Despite the differences in analytical structure and founding hypotheses, the models of endogenous growth explain steady state growth at a positive and constant endogenous rate. This important property depends on some form of non-decreasing returns to scale due to constant marginal return in one or more accumulable factors.3 Lucas (1988) argued that investment in education increases the stock of human capital; therefore the public provision of general education modifies the optimal accumulation of human capital and the long-run pattern of economic growth. Similarly, government expenditure on research and development (Romer, 1990), health (Bloom et al., 2001) and public infrastructures can influence the optimal rate of economic growth, introducing an externality in private decisions. Turnovsky (1996, 2000) notes that distorsive taxation can internalize the effect of these externalities, inducing an efficient intertemporal allocation.4 The basic hypothesis of Barro’s model (1990)5 is that the government purchases a constant share of private output and uses it to provide free public services to private producers. He considers all public expenditures that produce externalities generalized to the firms’ system, such as the defence of property rights, spending on justice, national defence, education, and so on. Public investments g(t) per unit of labour are financed with proportional taxes on income: g...
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