CAPITAL MOBILITY, FISCAL-POLICY, AND GROWTH UNDER SELF-FINANCING OF HUMAN-CAPITAL FORMATION

This paper, which is to appear in a volume honoring the memory of Doug Purvis, considers the effects of fiscal and financial policy on econo mic growth in open and closed economies, when human capital formation by young households is constrained by the illiquidity of human wealth. Both endogeneous and exogenous growth versions of the basic OLG model are analysed. We find that intergenerational redistribution policies that discourage physical capital formation may encourage human capital formation. Despite common technologies and perfect international mobi lity of financial capital, the non-tradedness of human capital and the illiquidity of human wealth make for persistent differences in produc tivity growth rates (in the endogenous growth version of the model) or in their levels (in the exogenous growth version). We also consider t he productivity growth (or level) effects of public spending on educat ion and of the distortionary taxation of financial asset income.