Dynamic Aspect of Growth and Fiscal Policy

Abstract

We develop an endogenous growth model driven by externalities of both private capital and public infrastructure. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We first study the steady state, focusing in detail on the non-Ricardian aspects of the model. We then examine the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time consistent equilibrium is also sub-optimal in terms of steady-state welfare, it does yield higher growth, through an accumulation of assets by the state and a cut of government consumption.endogenous growth, fiscal policy, time inconsistency.