Moisa Altar

Fiscal Policy, Public Capital and Economic Growth

The effect of public investment on economic growth is a crucial public policy issue. Empirical research into this question was stimulated by Aschauer (1989), who suggested that public capital has a powerful impact on the productivity of private capital. Aschauers results were controversial and have generated substantial empirical research directed at determining the robustness of his position. The present paper analyses the way in which public investment and fiscal policy influences the performances of economic growth. We analyze the impact of public investment on the dynamics of private capital formation in an intertemporal optimizing framework. Following W.H. Fischer and S.J.Turnovsky (1998), the public good is treated as a durable capital good, subject to congestion. The analysis is made on the basis of a dynamic model with discrete variables. The optimality conditions for the representative agents problem are deduced on the basis of the Maximum Principle for discrete dynamic systems (Altar, 1976). The production function considered within the model is a function of three variables: labour, stock of private capital and services obtained from the stock of public capital. A critical feature of the model concerns the specification of the productive services derived by the representative agent from public capital. Several variants for this function are analysed in the paper. We also analyse several alternative modes of government financing. A qualitative analysis of the optimal trajectories is performed, on the basis of the information provided by the Maximum Principle, concerning the dynamics of the dual variable and the properties of the Lagrange multipliers. Finally, we analyse the influence of several fiscal and investment decisions on the optimal trajectories and on the performance-function of the model.

Fiscal and Monetary Policies and Economic Growth

The paper analyses the way in which monetary and fiscal policy influences the performances of economic growth. The analysis is made on the basis of a dynamic model with discrete variables of the Sidrauski- Brock type, with infinite-lived households and money in the utility function. The model is with a representative private agent and a government sector consisting of a consolidated fiscal authority and central bank. Households receive an exogenous perishable endowment each period, decide about consumption and pay net real lump-sum tax. The state variable of the model is government debt, and the decision variables are: consumption and the amount of money detained by the agent. The optimality conditions are obtained by using the Maximum Principle for discrete dynamic systems. A qualitative analysis of the optimal trajectories is performed, on the basis of the information provided by the Maximum Principle, concerning the dynamics of the dual variable and the properties of the Lagrange multipliers. Finally, we analyze the influence of several monetary and fiscal decisions on the optimal trajectories and on the performance-function of the model.

Pricing American Options in a Mild Stochastic Environment

The problem of pricing derivative financial products is central to the theory of capital markets. An option is a financial contract conveying its owner the right of buying or selling a financial asset (underlying asset) at a preset strike price K, at a fixed expiration date T (maturity). Unlike European options, which can be exercised only at maturity date, an American option can be exercised at any time t prior to the maturity date. Most of the option pricing methods, starting with the well-known Black-Scholes model (1973), are based on the assumption that the market uncertainty can be modeled by a Wiener process. In this context, while it is possible to obtain convenient analytical option pricing formulae for European options, it is very difficult to obtain exact results for American options. In the present paper, we assume that the market uncertainty is modeled by a more regular stochastic process, which was called, by A. Halanay, a mild stochastic environment. In this context, we are able to obtain precise stopping rules, determining the exact exercise time and the exact price of an American option.

The Influence of Monetary and Fiscal Policies on Social Welfare

The paper analyses the way in which monetary and fiscal policy influences the performances of economic growth and social welfare. The analysis is made on the basis of a dynamic model with discrete variables. The model is with a representative private agent and a government sector consisting of a consolidated fiscal authority and central bank. Households, in each period, decide about consumption, investment in physical capital, and financial investment in government bonds. The model is built in such a way that satisfaction of the budget constraint of the representative household implies satisfaction of the budget constraint of the government. The model has two state variables: the first is private wealth (consisting of money, bonds and physical capital), and the second is physical capital. The decision variables are: private nominal consumption, social nominal consumption and the amount of bonds bought by the private agent. The optimality conditions are obtained by using the Maximum Principle for discrete dynamic systems. A qualitative analysis of the optimal trajectories is performed, on the basis of the information provided by the Maximum Principle, concerning the dynamics of the dual variables. Finally, we analyze the influence of several monetary and fiscal decisions on the optimal trajectories of the model.

The Influence of Fiscal Policy on Economic Growth

In this paper we analyze the influence of several types of fiscal policies on the process of economic growth, namely on the rate of growth of consumption. We formulate and analyze two types of economic growth models. The first refers to the way in which a consumer-producer agent takes decisions when the elements concerning fiscal policy are exogenous. The second model is a global model including the economic agent, as well as the government. Both models are dynamic models with discrete variables on infinite horizon. The technique used is provided by the Maximum Principle. We perform a comparative analysis of the results obtained on the basis of the two models. What is surprising is the conclusion that the growth rate of consumption is larger for the second model. At the same time, we prove that if the ratio between private and public consumption is equal to the ratio between the elasticity coefficients of the utility function, then the rate of economic growth does not depend on the value of the tax rate.