COMPARATIVE DYNAMICS AND OPTIMAL FISCAL POLICY IN A SIMPLE MODEL OF ENDOGENOUS GROWTH

I analyze optimal fiscal policy choices in a continuous time endogenous growth model similar to Barro’s. The government uses income taxes from representative ‘rich’ and ‘poor’ households to finance purchases of productive goods and to make transfer payments to poor households. Increases in government purchases can increase the growth rate, while increases in transfers reduce growth. I examine the socially optimal allocation of government resources to purchases and transfer payments and describe conditions under which both the rich and poor would benefit from cuts in entitlements if the savings are used to finance increased government purchases of productive goods.