A Model of Economic Growth with Public Finance: Dynamics and Analytic Solution

Abstract

This paper studies the equilibrium dynamics of a growth model with public finance where two different allocations of public resources are considered. The model simultaneously determines the optimal shares of consumption, capital accumulation, taxes and composition of the two different public expenditures which maximize a representative household's lifetime utilities in a centralized economy. The analysis supplies a closed form solution. Moreover, with one restriction on the parameters () we fully determine the solutions path for all variables of the model and determine the conditions for balanced growth. Keywords: Growth models; Fiscal policy; Public spending composition JEL Classifications: E13; H50; H20; O40