On the dynamics of growth and fiscal policy with redistributive transfers

Abstract

This paper continues the study of optimal fiscal policy in a growing economy, by studying the case in which the government simultaneously provides three main categories of expenditures; public production services, public consumption services and state-contingent redistributive transfers. We make two contributions to the literature. Firstly, we set up a dynamic general equilibrium model of endogenous growth, in which rational voters choose the capital tax rate and the allocation of total tax revenues between productive government expenditures (public production services) and non-productive ones (public consumption services and redistributive transfers). We study the properties of these policies and their impact on growth. Secondly, we deliver analytic results for the long-run and transitional dynamics of optimal fiscal policies and endogenous growth. In particular, we establish existence and investigate the possibility of uniqueness and dynamic determinacy, and how this possibility is affected by the chosen allocative and redistributive policies.