Fiscal Policy in an Endogenous Growth Model with Public Capital and Pollution

Abstract

In this paper we study growth and welfare effects of fiscal policy in an endogenous growth model with public capital and environmental pollution. As to pollution we assume that it is due to aggregate production. Pollution does not have direct effects as concerns production possibilities but it only reduces utility of the household. The paper then studies growth effects of fiscal policy for the model on the balanced growth path and taking into account transition dynamics. Further, welfare effects of fiscal policy are analyzed and it is demonstrated that the growth maximizing values of tax rates may be different from those values which maximize the long run balanced growth rate.