Public investment,the rate of return,and optimal fiscal policy in a stochastically growing economy |
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| Institution: | 1. Economics and Planning Unit, Indian Statistical Institute, 7, S.J.S. Sansanwal Marg, New Delhi 110 016, India;2. China Center for Economic Research, National School of Development, Peking University, Beijing 100871, China;1. National Chengchi University, Wenshan, Taipei, Taiwan;2. Professor, Department of Public Finance; Director, Taiwan Study Center, National Chengchi University, 64 Zhi-Nan Road, Section 2, Wenshan, 116, Taipei, Taiwan;3. Washington University in St. Louis and NBER, United States;1. European Commission, Joint Research Centre (JRC), Institute for Prospective Technological Studies (IPTS), C/Inca Garcilaso, 3, E-41092 Seville, Spain;2. European Central Bank, DG International and European Relations, Frankfurt am Main, Germany;1. Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS and CEPII, AMSE, 5-9 Boulevard Maurice Bourdet, CS 50498, 13205 Marseille Cedex 1, France;2. Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS and CEPII, France |
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| Abstract: | This study examines the optimal fiscal policy in a stochastic endogenous growth model with private and public capital. The government is willing to actualize a socially optimal equilibrium using a lump-sum tax and government debt linked to public investments, subject to the budget constraint under the golden rule of public finance. A socially optimal fiscal policy states that a deterministic rate of return on government bonds sets the marginal product of public capital. Moreover, public investments optimally adjust the ratio of private capital to public capital to equate the rates of return on such capital. The presence of stochastic disturbances results in a disparity between the optimal marginal products of the two types of capital, as reported in previous empirical studies. This disparity significantly affects the socially optimal growth rate in response to investment risk. |
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