A Neoclassical Growth Model with Public Spending

TitleA Neoclassical Growth Model with Public Spending
Publication TypeWorking Paper
Year of Publication2010
AuthorsOA. Carboni, G. Medda
Number2010_33
Keywordsfiscal policy, neoclassical and augmented growth models
Abstract

This paper analyses the effect of public expenditures in the context of a modified Solow model of capital accumulation with optimising agents. The model identifies optimal government size and optimal composition of public expenditures which maximize the rate of growth in the dynamics to the steady state and maximize the long run level of per capita income. Different allocations of public resources lead to different growth rates in the transitional dynamics depending on their elasticity. However effects from fiscal policy are only temporary and disappear in the steady state. Finally we argue that neglecting the non- linear nature of the relationship between government spending and growth may lead empirical studies to biased results.

Citation Key3076
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