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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Heterogeneity; Financial Deepening; Growth Policies
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

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