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Optimal Growth Policies in a Two-Sector Model with Financial Market Imperfections

Nguyen, Quoc Hung (2018): Optimal Growth Policies in a Two-Sector Model with Financial Market Imperfections.

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Abstract

This paper studies the effects of fiscal policy on growth in an environment where heterogeneous entrepreneurs face collateral borrowing constraints and human capital accumulation is influenced by public spending. In such an environment, the paper first shows that positive public spending on human capital improves growth. The paper then explores the role of a policy mix that consists of capital income tax and capital subsidy to productive entrepreneurs in addressing growth. The theoretical analysis shows that when the productivity distribution is heavy-tailed, the government can utilize the capital subsidy instrument as a non-linear function of the idiosyncratic productivity to achieve growth maximizing policy mix.

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