The Influence of Fiscal Policy on Economic Growth

Abstract

In this paper we analyze the influence of several types of fiscal policies on the process of economic growth, namely on the rate of growth of consumption.

We formulate and analyze two types of economic growth models. The first refers to the way in which a consumer-producer agent takes decisions when the elements concerning fiscal policy are exogenous. The second model is a global model including the economic agent, as well as the government.

Both models are dynamic models with discrete variables on infinite horizon. The technique used is provided by the Maximum Principle.

We perform a comparative analysis of the results obtained on the basis of the two models. What is surprising is the conclusion that the growth rate of consumption is larger for the second model. At the same time, we prove that if the ratio between private and public consumption is equal to the ratio between the elasticity coefficients of the utility function, then the rate of economic growth does not depend on the value of the tax rate.

Keywords: Fiscal Policy, Economic Growth, Social Capital, Maximum Principle

JEL Classification: C61, D99, E31, E41, E62, E63, H62, H63, O41