Fiscal Policy and Adjustment Costs of Private Investment in an Endogenous Growth Model with Public Capital
Volume 62 (2006) / Issue 4, pp. 455-470 (16)
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This paper develops an endogenous growth model with public capital and examines the growth and welfare effects of a fiscal policy that is financed by corporate taxation. In the model, we incorporate the investment decision-making of competitive firms by considering the adjustment costs of private investment. We show that there arises an indeterminacy of the balanced growth path. Furthermore, it is demonstrated that growth-maximizing policy is not equivalent to welfare-maximizing policy on the balanced growth path.