Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-22T20:35:39.114Z Has data issue: false hasContentIssue false
  • English
  • Français

PRODUCTIVE GOVERNMENT EXPENDITURE IN A STOCHASTICALLY GROWING ECONOMY

Published online by Cambridge University Press:  01 December 1999

Stephen J. Turnovsky
Stephen J. Turnovsky
Affiliation:
University of Washington, Seattle
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes productive government expenditure in a stochastic AK growth model. First, a centrally planned economy is characterized, emphasizing the trade-off between the effects of both deterministic and stochastic government expenditures on the equilibrium growth rate and its variance. Both the growth-maximizing and the welfare-maximizing shares of government expenditure are derived and shown to depend (differentially) upon the degree of risk in the economy. Whereas production risk reduces the welfare-maximizing share of government expenditure, it may either increase or decrease the growth-maximizing share, depending upon the degree of risk aversion. Next, the stochastic equilibrium in a decentralized economy is derived. The first-best optimal tax structure is characterized and its dependence on risk is determined. The formal analysis is supplemented by some numerical simulations to assess the quantitative significance of risk and the divergence that this generates between the welfare-maximizing and growth-maximizing size of government.

Keywords

Productive GovernmentStochastic GrowthOptimal Tax
Type
Research Article
Information
Macroeconomic Dynamics , Volume 3 , Issue 4 , December 1999 , pp. 544 - 570
Copyright
© 1999 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)