Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare

Donadelli, Michael; Grüning, Patrick

doi:10.2139/ssrn.2955089

Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare

SAFE Working Paper No. 171

66 Pages Posted: 20 Apr 2017

See all articles by Michael Donadelli

Michael Donadelli

Goethe University Frankfurt - Research Center SAFE

Patrick Grüning

Bank of Lithuania - Center of Excellence for Finance and Economic Research (CEFER); Vilnius University - Faculty of Economics and Business Administration; Research Center SAFE

There are 2 versions of this paper

Date Written: April 13, 2017

Abstract

We study the general equilibrium implications of different fiscal policies on macroeconomic quantities, asset prices, and welfare by utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: "incremental" innovations by incumbents and "radical" innovations by entrants. The government levies taxes on labor income and corporate profits and supplies subsidies to consumption, capital investment, and investments in research and development by entrants and, if applicable, incumbents. With these models at hand, we provide new insights on the interplay of innovation dynamics and fiscal policy.

Keywords: Endogenous growth, Asset pricing, Government, Fiscal policy, Heterogeneous innovation

JEL Classification: E22, G12, H20, I30, O30

Suggested Citation: Suggested Citation

Donadelli, Michael and Grüning, Patrick, Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare (April 13, 2017). SAFE Working Paper No. 171. Available at SSRN: https://ssrn.com/abstract=2955089 or http://dx.doi.org/10.2139/ssrn.2955089