NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Government Spending and Taxation in Endgenous Growth Models

Giancarlo Corsetti, Nouriel Roubini

NBER Working Paper No. 5851
Issued in December 1996
NBER Program(s):   PE

This paper analyzes optimal spending, tax and financial policies in models of endogenous growth where public spending is productive. We extend previous work in four directions. First, we analyze optimal policies when the government is allowed to borrow and lend, rather than being restricted to run a balanced budget in every period. Second, we develop a model with a separate human capital accumulation sector. Therefore, the properties of optimal policies depend on whether government spending affects the productivity of the final goods sector or the human capital accumulation sector. Third, we consider the policy implications of alternative assumptions about which factor of production benefits from the external effects of productive public goods. Fourth, we study the implications of restrictions on the menu of tax instruments available to the policy maker. We contrast optimal tax rates on human and physical capital under different assumptions on technology and distribution. We analyze the welfare properties of public debt and assets.

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Document Object Identifier (DOI): 10.3386/w5851

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