An Endogenous Growth Model with Productive Public Spending and Uncertain Lifetime Consumers.

Abstract

This paper deals with the effects of productive public spending on long-term economic growth within an endogenous growth model with uncertain lifetime consumers in the presence of lump-sum transfers, public consumption and investment subsidies. A flexible framework capable of analysing the steady state effects of fiscal policy in both infinite and finite horizons cases is provided. The Barro rule for the optimal provision of public investment is extended to the finite horizons case. Such a modified Barro rule is lower than the Barro Rule and decreasing in the probability of death parameter. The negative effect on the balanced growth rate of an increase in non-productive public spending is found in the finite horizons as well as in the infinite horizons case. However, increases in either public consumption or lump-sum transfers to households are found to be less effective in reducing long-term economic growth under the assumption of uncertain lifetime consumers. The condition under which the government needs to increase public investment in the presence of either higher transfers to households or higher public consumption is derived. Finally, an optimal rule for investment subsidies provision is analytically derived under the assumption of uncertain lifetime consumers.