Endogenous Growth Modeling of Productive Spending and Debt Financing with Policy Relevance to Fiscalist Rules in Greece

Abstract

In this research paper, we critically examine certain stylised facts, from the view of capital fundamentalism, claiming that national fiscal policies can be considered as the primary determinant of dynamic and equilibrium economic growth, and then carefully assess the effectiveness of particular macro-financial policies, after accounting for optimal welfare externalities associated with public expenditures and taxation. Another purpose of the present policy paper is to establish, inter alia, a fiscal rationale on the output growth-debt dynamics interplay that, reflecting upon the continuously traumatic Greek experience with persistently large imbalances in the general accounts of its public finances, might work as a notional bridge, by reconciling descriptive analyses with prescriptive methodologies, in order to produce a somewhat convenient basis for theoretical advances in the research field of prudent fiscalist rules and effective debt stabilisation policies. In accomplishing such a hybrid task, we derive rather than postulate the simplest possible neoclassical formulation, aimed at constituting a benchmark for endogenous fiscalist rules, underpinning the role of productive public expenditure and the complementarity properties ensuing for the governmental size and the rate of economic growth. By encompassing both traditional and modern literature strands, the first thematic puts forward an intertemporal model of a small open economy, with the formation of investment subjected to adjustment costs, that is suitable to capture the dynamic interdependence of output growth and the real interest rate, with emphasis on the crucial impact for private capital accumulation and aggregate output productivity. A non-trivial role is also attributed to capital efficiency characterising both the analysis of transitional dynamics and the steady-state effects. The second thematic introduces a closed-type economy, with policy variations, such that both the roles of productive spending and government financing are greatly enhanced while the analogous effects on the production and/or utility functions are equivalently addressed. As a principal result, it is revealed that the after-tax marginal product of capital, hence the rate of return, depends positively on the ratio of private to public capital, something that sharply contradicts the results obtained in earlier strands of research where the rate of return was invariant with that particular ratio. A rather subsidiary outcome, from reconsidering optimality properties, in accordance to conventional priors, is that maximisation of private welfare corresponds to maximisation of the growth rate of the economy, thereby satisfying the natural condition for productive efficiency. The final thematic, perceived as a humble policy proposal, concentrates on the financing methods of government expenditures from the perspective of the fiscal-growth nexus in assessing the effects of a moderate budgetary expansion by utilising a bond-finance scheme. Intuitively, while challenging in parallel the equilibrium multiplicity hypothesis, it is proved that the policy choice of bonds instead of taxes would be capable of generating more growth and inducing less debt over the medium term, therefore laying the ground for a solid recovery with larger output and bigger employment levels. The strategic orientations stemming from the conceptual origins underpinning such a composite structure, although open to several alternative interpretations, upon functional modifications, would be progressed as serving a multiple-objectives mechanism and/or substantiating a policy-targets device, enriched with a smooth vintage of design thoughtfulness and a robust flavour of practical applicability.