An endogenous growth model with public capital and government borrowing

The paper presents an endogenous growth model with public capital. However, in contrast to recent studies on economic growth and fiscal policy, we allow for capital market borrowing by the government. Since the behavior by the government (composition of expenditure and borrowing) does not follow optimizing rules, we introduce fiscal regimes (rules) which define the behavior of the government. In strict fiscal regimes, government borrowing is used for public investment. In less strict regimes, it can also be used for debt service and public investment. In our model variants, government deficit does not necessarily entail a lower growth rate of the economy but the growth effects are different according to which rules are adopted. Moreover, in our context the growth maximizing income tax rate is different from zero. The model, contingent on the fiscal regime prevailing, can exhibit multiple equilibria and local indeterminacy.