Revisiting the Optimal Stationary Public Investment Policy in Endogenous Growth Economies

Abstract

ABSTRACT:One strand of the literature on endogenous growth concerns models in which public infrastructure a¤ects the private production process. A puzzle in this literature is that observed public investment-to-output ratios for developed economies tend to fall short of theoretical model-based optimal ratios. We reexamine the optimal choice of public investment in a more general and plausible framework, which allows for a gradual transition between di¤erent steady states, a lower depreciation rate for public capital than for private capital, an elasticity of intertemporal substitution that di¤ers from unity and the need to …nance a non-trivial share of public services in output in each period. Given other fundamentals in the economy, we show that the optimal public investment-to-output ratio is smaller for low-growth economies, for economies populated by consumers with low preferences for substituting consumption intertemporally and when public capital is durable. Moreover, for a calibrated economy, we show that a combination of these factors solves the public investment puzzle.

Personal Income Tax and Economic Growth: A Comparative Study Between China and Pakistan

“…Barro (1990) contributes a significant revolution to describe the influence of personal income tax on economic growth. According to Barro's setup, a surge in income taxes raises the rate of growth while growth becomes slower when income tax rates increase beyond a given threshold (Futagami et al, 1993;Aschauer, 2000;Marrero, 2008). In the past, various studies try to assess the progressivity of income tax structure in Pakistan.…”

Government spending and growth in a neoclassical model

“…development are the most often cited examples of publicly provided goods which contribute positively to aggregate production [38,5,35,31,24]. On the other hand observations in most developed countries that growth in the government spending is accompanied by a slowing of income growth, has given rise to the hypothesis that government size has a negative impact on economic performance.…”

Governmentally amplified output volatility

“…In fact, these conditions hold under our specified parameter on the basis of Marrero's (2008) Using the so-called differential operator method, we next turn to a derivation of the particular solutions of the case of inhomogeneous linear differential equation.…”

“…The values mostly follow Marrero's (2008) benchmark calibration supposing the annual model of the US economy (see Table 1). Hence, the model's time period is defined as 1 year.…”

“…According to Marrero's (2008) calibration, in fact, G * /K * g and g * /k * are calculated to be 0.069 and 0.038, respectively. Hence, G * /K * g 1 and g * /k * 1 seem satisfactory assumptions.…”