Dynamic fiscal policies and unemployment in a simple endogenous growth model

Abstract

This paper analyzes the growth and employment effects of dynamic fiscal policies in an overlapping generations model with endogenous growth and imperfect labour markets. With balanced-budget policies, the modelled closed economy grows at a constant rate which is higher, the lower are the labour tax rate and the unemployment rate. Constant-flow budget policies are not feasible, while government Ponzi games are feasible only if economic agents have implausibly high savings rates. Furthermore, while constant-stock fiscal policies are sustainable, an increase in the debt-to-capital ratio is accompanied by higher taxes, a rise in unemployment and lower economic growth.