Fiscal policy in a Lucasian general equilibrium model with productive government spending

This paper analyzes the effects of fiscal policy on the steady-state growth rate of a two-sectorial endogenous growth model. Our model deviates from the literature by focusing on the linkage between government spending and financing policy due to the government budget constraint, and the role of productive government expenditures on growth. It can be shown that the impacts of fiscal policies depend heavily on the allocation of government expenditures. Long-run growth is affected by macroeconomic policies only through government investments in human capital, but not through expenditures accelerating market production. Therefore, an increase in human-capital related government expenditures financed by higher lump-sum taxation or income tax rate has a positive effect on the steady-state growth rate. However, an increase in expenditures on government consumption and infrastructure financed by a higher rate of income tax or/and lump-sum taxation can substantially affect steady-state levels, but does not influence the fundamental growth rate of the economy.