Growth and Fiscal Policy: A Positive Theory

45 Pages Posted: 13 Oct 2012

See all articles by Marco Battaglini

Marco Battaglini

Princeton University - Department of Economics; Centre for Economic Policy Research (CEPR)

Levon Barseghyan

Cornell University

Date Written: August 1, 2012

Abstract

We present a political economy theory of growth in which the government affects the growth rate both directly through public investments in infrastructure, and indirectly through the effect of taxation on learning by doing. Policy choices are made by a legislature consisting of representatives elected by geographically defined districts. The legislature can raise revenues via a discretionary income tax and by issuing public debt. We study the equilibrium relationship between the dynamics of debt and the growth rate of the economy. We use the model to study the impact of an "austerity program" in which a country is forced to reduce the debt/GDP ratio. To quantify these effects, the model is calibrated to the U.S. economy.

Suggested Citation

Battaglini, Marco and Barseghyan, Levon, Growth and Fiscal Policy: A Positive Theory (August 1, 2012). Economic Theory Center Working Paper No. 41-2012, Available at SSRN: https://ssrn.com/abstract=2161358 or http://dx.doi.org/10.2139/ssrn.2161358

Marco Battaglini

Princeton University - Department of Economics ( email )

213 Fisher Hall
Princeton, NJ 08544
United States
609-258-4002 (Phone)
609-258-6419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Levon Barseghyan (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

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