Ramsey fiscal policy and endogenous growth

This paper examines the effects of fiscal policies on capital accumulation and economic performance in a simple endogenous growth model with elastic labor supply by focusing on the implementability of a competitive equilibrium with productive public spending and distortionary taxation. Given a feasible exogenous fiscal policy, productive public spending can, at first, lead to positive short-run and long-run growth in the unique competitive equilibrium. However, although strictly positive growth is possible in the short run, a Ramsey policy with productive public spending does not implement positive capital accumulation in the long run. Also, the local indeterminacy of Ramsey allocations, in conjunction with the global multiplicity, arises as an implementable competitive equilibrium with Ramsey policies: namely, a continuum of transitional dynamics and multiple balanced growth paths.