Title

Growth and fiscal policy: a positive theory

Author(s)

Levon Barseghyan Levon Barseghyan (Cornell University)

Marco Battaglini Marco Battaglini (Princeton University)

Abstract

We present a political economy theory of growth in which the government affects the growth rate both directly through public investments in infrastructure, and indirectly through the effect of taxation on learning by doing. Policy choices are made by a legislature consisting of representatives elected by geographically defined districts. The legislature can raise revenues via a discretionary income tax and by issuing public debt. We study the equilibrium relationship between the dynamics of debt and the growth rate of the economy. We use the model to study the impact of an austerity program in which a country is forced to reduce the debt/GDP ratio. To quantify these effects, the model is calibrated to the U.S. economy.

Creation Date

2012-08

Section URL ID

ET

Paper Number

wp041_2012_Barseghyan_Battaglini.pdf

URL

http://detc.princeton.edu/wp-content/uploads/2016/11/wp041_2012_Barseghyan_Battaglini.pdf

File Function

Jel

D010, E010, E600, H300, H500

Keyword(s)

GDP, growth rate, public investments, debt, revenue, taxes

Suppress

false

Series

10