Dynamic Aspect of Growth and Fiscal Policy

We develop an endogenous growth model driven by externalities of both private capital and public infrastructure. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We first study the steady state, focusing in detail on the non-Ricardian aspects of the model. We then examine the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time consistent equilibrium is also sub-optimal in terms of steady-state welfare, it does yield higher growth, through an accumulation of assets by the state and a cut of government consumption.