Growth and Employment Effects of Fiscal Regimes

Abstract

This paper presents an endogenous growth model with firms exhibiting external or internal increasing returns. Firms are either perfectly or monopolistically competitive. The paper extends fiscal policy results, to cases where innovations are intentionally generated by firms. To provide quantitative information, the model is calibrated to replicate EU7 aggregate data. The theoretical results indicate that distortionary taxes have strong negative effects on growth and employment and they tend to increase with the degree of private returns. However, the quantitative results turn out to be fairly robust with respect to alternative assumptions on the degree of internal increasing returns made in the process of calibrating the model.