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Government spending composition, aggregate demand, growth, and distribution

Daniele Tavani and Luca Zamparelli

Keywords: Keynesian growth; government spending composition; factor shares; fiscal policy

We study a demand-driven growth and distribution model with a public sector, both without and with government debt. Government spending is used to finance the accumulation of public capital and to pay wages to public employees. The interaction between public capital and induced technical change makes long-run growth: (i) hump-shaped in the composition of government spending, (ii) wage-led, and (iii) government-spending-led. Provided that the interest rate on government bonds is kept below the growth rate, the size of government debt is irrelevant for long-run growth.

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