Growth and Welfare Effects of Fiscal Policy in an Endogenous Growth Model with Public Investment

In this article we present an endogenous growth model with productive public investment in infrastructure capital. Further, we suppose that the government pays lump-sum transfers to the household and subsidizes private investment. First, we demonstrate that there exists a unique balanced growth path which is a saddle point. Then, we study growth and welfare effects of fiscal policy along the balanced growth path. In particular, we derive the growth maximizing income tax rate and study how that variable depends on other fiscal parameters. Further, growth effects of varying the investment subsidy rate and of transfer payments are also analyzed. In addition, we demonstrate that growth and welfare maximization generally are not equivalent goals in a second best environment