PUBLIC DEFICITS AND INCOME DISTRIBUTION: RESULTS OF AN ECONOMETRIC BUSINESS CYCLE MODEL FOR THE FEDERAL REPUBLIC OF GERMANY

Abstract

In this chapter we develop a theoretical endogenous growth model where the capital in public infrastructures has an influence on the productivity of private firms. We compare the optimum and equilibrium growth rates and welfare levels, and the effects on the inefficiency of the decentralized equilibrium of the way public expenditures are financed. Then we analyse the determinants of the optimum level of public investment and of the optimal taxation structure, and we concentrate in particular on the possibilities of reducing the inefficiency associated with the decentralized equilibrium in endogenous growth models. Finally we examine the effects of debt financing in that kind of model.