Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth

Misch, Florian; Gemmell, Norman; Kneller, Richard

doi:10.1111/jpet.12038

Cited by 23 publications

(10 citation statements)

References 25 publications

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“…We abstract from infrastructure provided by the government. For a recent study investigating growth and welfare‐maximizing policies which focuses on public infrastructure, see Mischi, Gemmell, and Kneller ().…”

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confidence: 99%

Quantifying Optimal Growth Policy

Grossmann

Steger

Trimborn

2016

J Public Economic Theory

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We determine the optimal growth policy within a comprehensive endogenous growth model. The model accounts for important elements of the tax transfer system and for transitional dynamics. It captures the three main growth engines based on standard ingredients in order to understand the quantitative policy and welfare implications of the existing theory. Our calibrated model indicates that the current policy leads to severe underinvestment in both R&D and physical capital, implying that both R&D and capital investment subsidies should be increased substantially. We argue that previous research has overlooked a strong evidence for the welfare significance of the quest for the optimal growth policy by failing to calibrate the distortionary tax system.

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confidence: 99%

Quantifying Optimal Growth Policy

Grossmann

Steger

Trimborn

2016

J Public Economic Theory

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“…We recognize that growth‐ and welfare‐maximizing policies may differ in these models, although differences in outcomes are often relatively small as shown by Misch et al . (). Firms only consider growth outcomes; for that reason we leave the consideration of welfare maximization to future analysis.…”

Section: Optimal Fiscal Policymentioning

confidence: 97%

Using surveys of business perceptions as a guide to growth‐enhancing fiscal reforms

2014

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non--Technical SummaryGood policy advice, in addition to requiring sound theoretical frameworks to identify growth--enhancing fiscal reforms, also needs a reliable evidence base. Much of this evidence base has tradi--tionally come from applications of econometric methods to various fiscal aggregates. However, con--cerns have recently been raised over the merits of this type of evidence for policy reform advice in practice; see, for example, Rodrik (2005), Hausmann et al. (2008a). It seems therefore useful to ques--tion whether business perception data included for instance in the World Bank Enterprise Surveys (WBES) are a useful additional source of information to guide policy makers' choices. These surveys contain ratings of various factors regarded as 'obstacles' or 'constraints' on firms' growth perfor--mance as identified by firm owners or managers. With firms' investment decisions likely to be an important driver of aggregate economic growth, and these investment decisions likely to be affected by firms' perceptions, such perception indicators could potentially be a valuable source of infor--mation on actual growth constraints. Indeed, a number of authors have recently argued over the merits of such business survey information as a reliable identifier of actual constraints, and the policy reforms that might follow.The objective of this paper is to examine whether, and when, subjective perceptions of firms may be a useful source of information to help identify growth--enhancing fiscal reforms. Specifically, adopting the standard theoretical framework for the analysis of fiscal policy and long--run growth, we demon--strate that firms' perceptions can be expected to suffer from particular biases. We show that while these biases can be expected to be important for some fiscal policy reform options, they are not for others. This suggests that it is important to distinguish between the specific contexts in which such business perception information is likely to offer reliable or unreliable guidance to growth--enhancing policy reforms. The essence of our argument is that, in part because of the way business survey ques--tions are constructed, firms' responses can be expected to focus on the direct effects of policies alle--viating particular constraints that they see as obstacles, while ignoring the externalities, or indirect effects of these policies. We exploit this assumption to model firm perceptions of fiscal policy--related constraints including taxation and...

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“…While in these models, growth and welfare maximization are not identical, in practice, growth maximization is less complex and more common as changes in output are easier to observe than welfare. In addition, the di¤erences in outcomes between growth and welfare maximization in similar models are often small (Misch et al (2008a)). Optimal …scal policy therefore refers to the growth-maximizing values of the tax rate and of the public spending shares of public services and public investment (denoted by and 1;2 , respectively).…”

Section: Benchmark Case: Optimal Fiscal Policy With Cobb-douglas Techmentioning

confidence: 99%

“…The model we develop considers two distinct productive public spending categories, public services and public capital, so that the level of public 2 As shown by Misch et al (2008a), growth maximization is often a reasonable close proxy of welfare maximization and often easier to compute. 3 Despite their prevalence in practice and despite the fact that they give rise to the possibility of second-best outcomes, informational limitations and budget rigidities have not previously been considered in models of this type.…”

Section: Introductionmentioning

confidence: 99%

Fiscal Policy and Growth with Complementarities and Constraints on Government

2011

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp11018.pdf Non-Technical SummaryGovernments are subject to a number of constraints that affect their ability to set fiscal policy optimally. This paper considers two. Firstly, governments are inevitably imperfectly informed about the production technology of firms and household preferences which both determine what level and what composition of public spending are optimal. Secondly, governments are constrained in their ability to change various elements of fiscal policy, due to, for example, quasi-fixed expenditure items such as social welfare benefits linked to entitlement conditions and interest payments that depend on the stock of public debt accumulated in the past. Other factors that constrain governments in this respect include limited administrative capacity (governments are only able to concentrate on a limited number of issues at a time) and limited political capital required for fiscal changes. We refer to this type of constraint as budget rigidities.In this paper we derive the optimal level and the optimal composition of public spending in the situation in which governments are constrained in their ability to alter both and know little about the relative growth benefits of different public spending categories. As a theoretical framework, we use endogenous growth models with public finance in which fiscal policy affects the long-run growth rate of the economy. Previous papers that have used this class of models typically ignore these constraints on governments, and assume that private and public inputs are substitutes.We generate a number of interesting results with respect to optimal fiscal policy in the presence of budget rigidities, informational limitations, or both in the realistic case when private and public inputs to private production that are provided by the government are complements. First, we show that the optimal level of productive public spending and the composition are interrelated: in particular, the optimal level of spending is higher when the composition is suboptimal, and the optimal share of public resources allocated to public investment may be very low when the level of spending is either too high or too low due to budget rigidities. This result contrasts with the common perception that public investment is the most important public spending category for long-run growth.Secondly, we show that imperfect knowledge of the government is much more...

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Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth

Cited by 23 publications

References 25 publications

Quantifying Optimal Growth Policy

Quantifying Optimal Growth Policy

Using surveys of business perceptions as a guide to growth‐enhancing fiscal reforms

Fiscal Policy and Growth with Complementarities and Constraints on Government

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