Abstract
This paper shows that in a model of endogenous growth that does not exhibit the scale effect, taxes on consumption and labor income and the level and composition of public expenditure have no effect on steady-state growth. The only fiscal instruments that affect steady-state growth are taxes on asset and corporate income. In line with standard intuition, tax rates and public expenditure have level effects on income per capita. These results emphasize that although growth is endogenous, in the sense that it is determined by the model and it is subject to policy action, instruments that work by changing market size do not affect it. Effective growth-enhancing policies operate through the interest rate.
Similar content being viewed by others
References
Aghion, P., and P. Howitt. (1998). Endogenous Growth Theory. Cambridge: MIT University Press.
Backus, D., P. Kehoe, and T. Kehoe. (1992). “In Search of Scale Effects in Trade and Growth,” Journal of Economic Theory 58, 377-409.
Barro, R. J. (1990). “Government Spending in a Simple Model of Endogenous Growth,” Journal of Political Economy 98, S103-S125.
Barro, R. J., and X. Sala-i-Martin. (1992). “Public Finance in Models of Economic Growth,” Review of Economic Studies 59, 645-661.
Barro, R. J., and X. Sala-i-Martin. (1995). Economic Growth. New York: McGraw Hill.
Cohen, W., and S. Klepper. (1996). “A Reprise of Size and R&D,” Economic Journal 106, 925-951.
Cooley, T. F., J. Greenwood, and M. Yorukoglu. (1997). “The Replacement Problem,” Journal of Monetary Economics 40, 457-499.
Dinopoulos, E., and P. Thompson. (1998). “Schumpeterian Growth without Scale Effects,” Journal of Economic Growth 3, 313-335.
Dinopoulos, E., and P. Thompson. (1999). “Scale Effects in Schumpeterian Models of Economic Growth,” Journal of Evolutionary Economics 9, 157-187.
Easterly, W., et al. (1993). “Good Policy or Good Luck? Country Growth Performance and Temporary Shocks,” Journal of Monetary Economics 32, 459-484.
Easterly, W., and S. Rebelo. (1993). “Fiscal Policy and Economic Growth: An Empirical Investigation,” Journal of Monetary Economics 32, 417-458.
Harberger, A. C. (1964). “Taxation, Resource Allocation and Welfare,” in: The Role of Direct and Indirect Taxes in the Federal Revenue System, NBER and the Brookings Institution eds. Princeton; Princeton University Press.
Howitt, P. (1999). “Steady Endogenous Growth with Population and R & D Inputs Growing,” Journal of Political Economy 107, 715-730.
Jones, C. I. (1995a). “Time Series Test of endogenous Growth Models,” Quarterly Journal of Economics CX, 495-525.
Jones, C. I. (1995b). “R & D-Based Models of Endogenous Growth,” Journal of Political Economy 103, 759-784.
Kocherlakota, N., and K. Yi. (1997). “Is There Endogenous Long-Run Growth: Evidence from the United States and the United Kingdom,” Journal of Money, Credit, and Banking 29, 235-262.
Kneller, R., M. Bleaney, and N. Gemmell. (1999). “Fiscal Policy and Growth: Evidence from OECD Countries,” Journal of Public Economics 74, 171-190.
Laincz, C., and P. F. Peretto. (2003). Scale Effects, an Error of Aggregation Not of Specification: Empirical Evidence, manuscript, Duke University.
Mendoza, E. G., G. M. Milesi-Ferretti, and P. Asea. (1997). “On the Ineffectiveness of Tax Policy in Altering Long-Run growth: Harberger's Superneutrality Conjecture,” Journal of Public Economics 66, 99-126.
Peretto, P. F. (1998). “Technological Change and Population Growth,” Journal of Economic Growth 3, 283-311.
Peretto, P. F. (1999). “Cost Reduction, Entry, and the Interdependence of Market Structure and Economic Growth,” Journal of Monetary Economics 43, 173-195.
Peretto, P. F. (2001). Distortionary Taxes, Government Size and the Level and. Growth of Income per Capita, manuscript, Duke University.
Stokey, N. L., and S. Rebelo. (1995). “Growth Effects of Flat-Rate Taxes,” Journal of Political Economy 103, 519-550.
Turnovsky, S. J. (2000). “Fiscal Policy, Elastic Labor Supply, and Endogenous Growth,” Journal of Monetary Economics, 45, 185-210.
Young, A. (1998). “Growth Without Scale Effects,” Journal of Political Economy 106, 41-63.
Zeng, J., and J. Zhang. (2002). “Long-Run Effects of Taxation in a Non-Scale Growth Model with Innovation,” Economics Letters 75, 391-403.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Peretto, P.F. Fiscal Policy and Long-run Growth in R&D-based Models with Endogenous Market Structure. Journal of Economic Growth 8, 325–347 (2003). https://doi.org/10.1023/A:1026288415768
Issue Date:
DOI: https://doi.org/10.1023/A:1026288415768