Endogenous growth, government debt and budgetary regimes

In this paper we analyze an endogenous growth model, in which sustained per capita growth results from investment in public capital and the government is allowed to borrow from the capital market. As to the government behavio r we do not suppose that governments optimize but instead stick to some wel l-defined budgetary regimes. The impact of a deficit financed increase in p roductive government spending is analyzed. It is shown that the growth effe ct of this fiscal policy crucially depends on the budgetary regime in use. In particular, a more strict budgetary regime, that is, an economy where th e public deficit is primarily used for public investment, does nor necessar ily imply a lower growth rate. Simulations demonstrate that the growth maxi mizing income tax rate is about in the range of the elasticity of output wi th respect to public capital.