Estimating an Endogenous Growth Model with Public Capital and Government Borrowing

36 Pages Posted: 1 Sep 1997

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: January 6, 1997

Abstract

The paper presents and estimates an endogenous growth model with public capital. In contrast, however, to recent studies on economic growth and policy, we allow for capital market borrowing by the government. Since the behavior by the government (tax rates, spending and borrowing) does not follow optimizing rules, we introduce regimes (rules) which define the behavior of the government. In strict regimes government borrowing is used for public investment. In less strict regimes it can also be used for debt service and public investment. In our model variants government deficit does not necessarily entail a lower growth rate of the economy but the growth defects are different according to which rules are adopted. Moreover, in our context the growth maximizing income tax rate is different from zero. The model, contingent on the regime prevailing, can exhibit multiple equilibria and local and global indeterminacy. For two relevant regimes which roughly correspond to the cases of the U.S. and Germany the model is estimated by employing time series data from 1952 to 1990. The estimation strategy we propose is similar to the strategy employed to estimate Real Business Cycle (RBC) models. In the present case, as in RBC studies, the model to be estimated is nonlinear in parameters. We employ a GMM estimation using Newey and West (1987) weighting matrices. The estimated structural parameters for the two economies fall into a reasonable range. The results permit us to interpret the contribution of public capital and government borrowing to economic growth and the different growth experiences of the American and German economies in the post-war period. Moreover, our methodology allows us to also explore the sustainability of public debt for the U.S. as well as Germany.

JEL Classification: E62, H21, H50, H63

Suggested Citation

Greiner, Alfred and Semmler, Willi, Estimating an Endogenous Growth Model with Public Capital and Government Borrowing (January 6, 1997). Available at SSRN: https://ssrn.com/abstract=22507 or http://dx.doi.org/10.2139/ssrn.22507

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, 33501
Germany
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HOME PAGE: http://phoenix.wiwi.uni-bielefeld.de/lehrbereiche/vwl/wipol

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

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