Fiscal Policy and Growth with Complementarities and Constraints on Government

41 Pages Posted: 14 Mar 2011

See all articles by Florian Misch

Florian Misch

ZEW – Leibniz Centre for European Economic Research

Norman Gemmell

Victoria University of Wellington - Victoria Business School

Richard Kneller

University of Nottingham

Date Written: 2011

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.

Keywords: Imperfect Knowledge, Economic Growth, Productive Public Spending, Optimal Fiscal Policy

JEL Classification: E62, H21, H50, O40

Suggested Citation

Misch, Florian and Gemmell, Norman and Kneller, Richard, Fiscal Policy and Growth with Complementarities and Constraints on Government (2011). ZEW - Centre for European Economic Research Discussion Paper No. 11-018. Available at SSRN: https://ssrn.com/abstract=1783575 or http://dx.doi.org/10.2139/ssrn.1783575

Florian Misch (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Norman Gemmell

Victoria University of Wellington - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

Richard Kneller

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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