Estimating an Endogenous Growth Model with Public Capital and Government Borrowing: U.S. and Germany 1960–1995

Abstract

The paper presents and estimates an endogenous growth model with public capital and government borrowing. Government behavior (tax rates, spending and borrowing) does not follow optimizing rules but is restricted by two fiscal regimes (rules). In the strict fiscal regime government borrowing is used for public investment only. In the less strict regime it can also be used for public investment and to a certain degree for the debt service. The growth rate differs in our model variants according to which rule is adopted. Moreover, the growth maximizing income tax rate is different from zero. For the two relevant fiscal regimes, which correspond roughly to the cases of the U.S. and Germany, the model is estimated by employing time series data from 1960.4 to 1992.1 and 1966.1 to 1995.1 respectively. The results suggest an explanation for the different time paths of economic variables in the American and German economies in the post-war period.