A CLOSED FORM SOLUTION FOR A GROWTH MODEL WITH EXTERNALITIES AND PUBLIC SPENDING
Abstract
This paper studies the equilibrium dynamics of a growth model with public spending. The model considers negative production externalities by explicitly including them as unfavorable effects in the production function. Differently from conventional analysis here government spending along with private production, also generate negative externalities. The model simultaneously determines the optimal shares of consumption, capital accumulation, taxes and composition of the two different public allocations, which maximize the representative household's lifetime utilities in a centralized economy. Moreover, with one restriction on the parameters we fully determine the solutions path for all variables of the model and determine the conditions for balanced growth. Given the active role the government has in determining the level of production, the higher the externalities compared to the optimum, the lower the tax rate.
References
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[21] Futagami, K., Morita, H., and Shibata, A. 1993. Dynamic analysis of an endogenous growth model with public capital, Scandinavian Journal of Economics 95: 607-25.
[22] Ghosh, S., and Gregoriou, A. 2008. The composition of government spending and growth: is current or capital spending better? Oxford Economic Papers 60: 484-516.
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[29] Gupta, M.R., and Barman T.R. 2009. Fiscal policies, environmental pollution and economic growth Economic Modeling 26: 1018-1028.
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[31] Hiraguchi, R. 2009. A note on the closed-form solution to the Lucas-Uzawa model with externality, Journal of Economic Dynamics and Control 33: 1757-1760.
[32] Itaya, J.-i. 2008. Can environmental taxation stimulate growth? The role of indeterminacy in endogenous growth models with environmental externalities, Journal of Economic Dynamics and Control 32: 1156-1180.
[33] Kneller, R., Bleaney, M.F., and Gemmell, N. 1999. Fiscal policy and growth: evidence from OECD countries, Journal of Public Economics 74: 171-90.
[34] Lee, J. 1992. Optimal size and composition of government spending, Journal of the Japanese and International Economies 6: 423-39.
[35] Ligthart, J.E., and van der Ploeg, F. 1994. Pollution, the cost of public funds and endogenous growth, Economics Letters 46: 339-349.
[36] Lucas, R. 1988. On the mechanics of economic development, Journal of Monetary Economics 22: 3-42.
[37] Meng, Q., and Yip C.K. 2008. On indeterminacy in one-sector models of the business cycle with factor generated externalities, Journal of Macroeconomics 30: 97-110.
[38] Nakada, M. 2004. Does environmental policy necessarily discourage growth? Journal of Economics 81: 249-275.
[39] Ricci, F. 2002. Environmental policy and growth when inputs are differentiated in pollution intensity. FEEM Working Paper 16.
[40] Smith, T.W. 2006. A closed form solution to the Ramsey model. Contributions to Macroeconomics 6: 1-27.
[41] Turnovsky, S.J., and Fisher, W.H. 1995. The composition of government expenditure and its consequences for macroeconomic performance. Journal of Economic Dynamics and Control 19: 747-786.
[42] Uzawa, H. 1965. Optimum technical change in an aggregative model of economic growth International Economic Review 6: 18-31.
[43] Zhang, J.S. 2011. The analytical solution of balanced growth of non-linear dynamic multi-sector economic model, Economic Modeling 28: 410-421.
[2] Antoci, A. and Sodini, M. 2009. Indeterminacy, bifurcations and chaos in an overlapping generations’ model with negative environmental externalities, Chaos, Solitons & Fractals 42: 1439-1450.
[3] Arrow, K.J., and Kurz, M. 1969. Optimal public investment policy and controllability with fixed private savings ratio, Journal of Economic Theory 1: 141-77.
[4] Ascauer, D.A. 1989. Is public expenditure productive? Journal of Monetary Economics 23: 177-200.
[5] Barro, R.J. 1990. Government spending in a simple model of endogenous growth, Journal of Political Economy 98: 103-25.
[6] Barro, R.J., and Sala-i-Martin, X. 1992. Public finance in models of economic growth, Review of Economic Studies 59(4): 645-661.
[7] Bovenberg, L.A. and Smulders S. 1995. Environmental Quality and Pollution Augmenting Technological Change in a Two-Sector Endogenous Growth Model, Journal of Public Economics 57: 369-391.
[8] Bovenberg, L.A., and de Mooij, R. 1997. Environmental Tax Reform and Endogenous Growth, Journal of Public Economics 63: 207-237.
[9] Carboni, O.A., and Medda, G. 2011, a. Size and composition of public spending in a neoclassical growth model. Metroeconomica 6: 150-170.
[10] Carboni, O.A., and Medda, G. 2011, b. Government spending and growth in a neoclassical model. Mathematics and Financial Economics 4: 269-285.
[11] Carboni, O.A., and Russu, P. 2012. The Conditions for a Balanced Growth in a Model with Public Finance: an Analytic Solution, manuscript University of Sassari.
[12] Chang, J.J., Lu, J.L., and Hu, S.W. 2011. Congestion Externalities of Tourism, Dutch Disease and Optimal Taxation: Macroeconomic Implications, The Economic Record 87: 90-108.
[13] Chen, B. 2006. Economic growth with an optimal public spending composition, Oxford Economic Papers 58: 123-36.
[14] Chen, B.L., and Lee, S.F. 2007. Congestible public goods and local indeterminacy: a two sector endogenous growth model, Journal of Economic Dynamics and Control 31: 2486-2518.
[15] Chilarescu, C. 2008. An analytical solution for a model of endogenous growth. Economic Modeling 25: 1175-1182.
[16] Devarajan, S., Swaroop V., and Zou, H-fu. 1996. The Composition of Public Expenditure and Economic Growth, Journal of Monetary Economics 37: 313-344.
[17] Economides, G., and Philippopoulos, A. 2008. Growth enhancing policy is the means to sustain the environment, Review of Economic Dynamics 11: 207-219.
[18] Eicher, T., and Turnovsky S.J. 2000. Scale, Congestion and Growth, Economica 67: 325-346.
[19] Ewijk, C.Van, and Wijinbergen, Van, S. 1995. Can abatement overcome the conflict between environment and economic growth? De Economist 143: 197-216.
[20] Fisher, W.H., and Turnovsky, S.J. 1998. Public investment, congestion, and private capital accumulation, Economic Journal 108: 399-412.
[21] Futagami, K., Morita, H., and Shibata, A. 1993. Dynamic analysis of an endogenous growth model with public capital, Scandinavian Journal of Economics 95: 607-25.
[22] Ghosh, S., and Gregoriou, A. 2008. The composition of government spending and growth: is current or capital spending better? Oxford Economic Papers 60: 484-516.
[23] Ghosh, S., and Roy, U. 2004. Fiscal Policy, Long-Run Growth, and Welfare in a Stock-Flow Model of Public Goods, Canadian Journal of Economics 37: 742-756.
[24] Glaeser, E.L., La Porta, R., and Lopez-De-Silanes, F. 2004. Do institutions cause growth? Journal of Economic Growth 9: 271-303.
[25] Glomm, G., Ravikumar, B. 1994. Public investment in infrastructure in a simple growth model Journal of Economic Dynamics and Control 18: 1173-1187.
[26] Glomm, G., and Ravikumar, B.1997. Productive government expenditures and long-run growth, Journal of Economic Dynamics and Control 21: 183-204.
[27] Greiner, A. 2005. Fiscal policy in an endogenous growth model with public capital and pollution, Japanese Economic Review 56: 67–84.
[28] Gruver, G. 1976. Optimal investment and pollution in a neoclassical growth context, Journal of Environmental Economics and Management 5: 165-177.
[29] Gupta, M.R., and Barman T.R. 2009. Fiscal policies, environmental pollution and economic growth Economic Modeling 26: 1018-1028.
[30] Haung, C.H., and Cai, D. 1994. Constant returns endogenous growth with pollution control, Environmental and Resource Economics 4: 383-400.
[31] Hiraguchi, R. 2009. A note on the closed-form solution to the Lucas-Uzawa model with externality, Journal of Economic Dynamics and Control 33: 1757-1760.
[32] Itaya, J.-i. 2008. Can environmental taxation stimulate growth? The role of indeterminacy in endogenous growth models with environmental externalities, Journal of Economic Dynamics and Control 32: 1156-1180.
[33] Kneller, R., Bleaney, M.F., and Gemmell, N. 1999. Fiscal policy and growth: evidence from OECD countries, Journal of Public Economics 74: 171-90.
[34] Lee, J. 1992. Optimal size and composition of government spending, Journal of the Japanese and International Economies 6: 423-39.
[35] Ligthart, J.E., and van der Ploeg, F. 1994. Pollution, the cost of public funds and endogenous growth, Economics Letters 46: 339-349.
[36] Lucas, R. 1988. On the mechanics of economic development, Journal of Monetary Economics 22: 3-42.
[37] Meng, Q., and Yip C.K. 2008. On indeterminacy in one-sector models of the business cycle with factor generated externalities, Journal of Macroeconomics 30: 97-110.
[38] Nakada, M. 2004. Does environmental policy necessarily discourage growth? Journal of Economics 81: 249-275.
[39] Ricci, F. 2002. Environmental policy and growth when inputs are differentiated in pollution intensity. FEEM Working Paper 16.
[40] Smith, T.W. 2006. A closed form solution to the Ramsey model. Contributions to Macroeconomics 6: 1-27.
[41] Turnovsky, S.J., and Fisher, W.H. 1995. The composition of government expenditure and its consequences for macroeconomic performance. Journal of Economic Dynamics and Control 19: 747-786.
[42] Uzawa, H. 1965. Optimum technical change in an aggregative model of economic growth International Economic Review 6: 18-31.
[43] Zhang, J.S. 2011. The analytical solution of balanced growth of non-linear dynamic multi-sector economic model, Economic Modeling 28: 410-421.
Published
2012-06-30
How to Cite
CARBONI, Oliviero A.; RUSSU, Paolo.
A CLOSED FORM SOLUTION FOR A GROWTH MODEL WITH EXTERNALITIES AND PUBLIC SPENDING.
Theoretical and Practical Research in Economic Fields, [S.l.], v. 3, n. 1, p. 4-12, june 2012.
ISSN 2068-7710.
Available at: <https://journals.aserspublishing.eu/tpref/article/view/1165>. Date accessed: 26 apr. 2024.
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