Complementarity in Models of Public Finance and Endogenous Growth

Victoria University of Wellington Working Paper in Public Finance No. 1/2014

29 Pages Posted: 8 Jan 2014

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: January 7, 2014

Abstract

This paper considers the effects of complementarity in private production between private and public inputs on optimal fiscal policy under the objective of growth maximization. Using an endogenous growth model with public finance and CES technology, it derives two central results. First, it shows that with complementarity, growth-maximizing fiscal policy is also affected by preference parameters, the degree of complementarity and the stock-flow properties of public inputs to private production. Second, it shows that optimal public spending composition and taxation are interrelated and also depend on the efficiency of public spending under growth maximization. Both results contrast with standard findings in the literature that are typically based on the assumption of Cobb-Douglas technology, and have important lessons for policy settings.

Keywords: Complementarity, Economic Growth, Productive Public Spending, Optimal Fiscal Policy

JEL Classification: E62, H21, H50, O40

Suggested Citation

Misch, Florian and Gemmell, Norman and Kneller, Richard, Complementarity in Models of Public Finance and Endogenous Growth (January 7, 2014). Victoria University of Wellington Working Paper in Public Finance No. 1/2014. Available at SSRN: https://ssrn.com/abstract=2375944

Florian Misch

ZEW – Leibniz Centre for European Economic Research ( email )

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

Norman Gemmell (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
27
Abstract Views
200
PlumX Metrics