Stephen J. Turnovsky

Mathematical theories of economic growth

One-sector growth models technological change in the one-sector model money and economic growth a preview of multisector growth models Leontief models and alternative techniques neoclassical multisector models without joint production turnpike theorems and efficient economic growth optimal economic growth.

Fiscal policy, elastic labor supply, and endogenous growth

Endogenizing labor supply leads to fundamental changes in the equilibrium structure of the AK growth model. The balanced growth equilibrium can be described in terms of two tradeoff loci relating the equilibrium growth rate to the fraction of time devoted to leisure. The implications of endogenous labor supply for fiscal policy are analyzed. Three issues are addressed. First, the effects of various distortionary tax changes and government expenditure changes on the equilibrium growth-leisure (employment) tradeoff are analyzed. Second, optimal fiscal policy is characterized. Finally, the formal analysis is supplemented by numerical results, focusing particularly on the quantitative welfare implications. JEL Classification: E62, J22, O41

Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress

This is the second of three volumes containing edited versions of papers and commentaries presented in invited symposium sessions of the Eighth World Congress of the Econometric Society. The papers summarize and interpret recent key developments and discuss future directions in a wide range of topics in economics and econometrics. The papers cover both theory and applications. Written by leading specialists in their fields, these volumes provide a unique survey of progress in the discipline.

The composition of government expenditure and its consequences for macroeconomic performance

Abstract This paper employs the intertemporal optimizing market-clearing framework to compare the effects of government consumption expenditure and government infrastructure expenditure on macroeconomic adjustment and performance. Particular attention is focused on the time path of the capital stock and its adjustment to both permanent and temporary changes in government expenditure are considered. We show how the effects of both forms of government expenditure on economic welfare can be broken down into: 1. (i) a direct crowding-out effect and 2. (ii) a second component which describes the intertemporal tradeoffs between the short-run rate of capital accumulation and the resulting change in the capital stock.

Empirical Evidence on the Formation of Price Expectations

Abstract This article investigates empirical evidence on the structure of price expectations in the United States during the post-Korean War period. The study utilizes semiannual data which describe price expectations for six months and twelve months ahead. The objective is to use these two sets of data to test some of the well-known expectational hypotheses. Incidental to this we determine whether expectations satisfy the rationality hypothesis, and we briefly consider the accuracy of the predictions.

Public Investment, Congestion, and Private Capital Accumulation

This paper analyzes the impact of public investment on the dynamics of private capital formation in an intertemporal optimizing market-clearing framework. The key feature characterizing the analysis is that the public good is treated as a durable capital good subject to congestion. The authors show how, in the presence of congestion, the effect of government investment on private capital formation involves a trade-off between the degree of substitution between private and public capital in production and the degree of congestion. Both lump-sum and distortionary tax financing are considered, with this trade-off being tightened in the latter case.

Optimal tax, debt, and expenditure policies in a growing economy

Abstract This paper employs an endogenous growth model to analyze the role of a consumption tax in enhancing growth and welfare. Provided government expenditure impacts directly on the decisions of private agents, two fiscal instruments are necessary to replicate the first best optimum. The tradeoff between consumption and income taxes to achieve this outcome is discussed and shown to depend upon the degree of congestion associated with the public good and the level of government expenditure relative to its social optimum. In general, the analysis suggests a potentially important role for a consumption tax as part of an overall optimal fiscal package.

Fiscal Policy In A Growing Economy With Public Capital

Public capital subject to congestion is introduced into an endogenous growth model and the transitional dynamic paths under alternative fiscal policies are characterized. Several new insights are obtained from this more general framework. During the transition, the two capital stocks always approach their common equilibrium growth rate from opposite directions. Government policy induces the more volatile response in the capital stock upon which it impinges most directly: private capital in the case of a tax, public capital in the case of expenditure. Finally, we characterize a time-varying income tax that enables the decentralized economy to replicate both the first-best transitional dynamics and steady-state equilibrium of a centrally planned economy. The steady-state component corrects for externalities that arise when government expenditure deviates from its social optimum, and the effects of congestion. The transitional component corrects for myopic behavior by the representative agent along the adjustment path.

CONSUMER'S SURPLUS, PRICE INSTABILITY, AND CONSUMER WELFARE

This paper evaluates the benefits to consumers from price stabilization in terms of the convexity-concavity properties of the consumers indirect utility function. It is shown that in the case where only a single commodity price is stabilized, the consumers preference for price instability depends upon four parameters: the income elasticity of demand for the commodity, the price elasticity of demand, the share of the budget spent on the commodity, and the coefficient of relative risk aversion. All of these parameters enter in an intuitive way and the analysis includes the conventional consumers surplus approach as a special case. The analysis is extended to consider the benefits of stabilizing an arbitrary number of commodity prices. Finally, some issues related to the choice of numeraire and certainty price in this context are discussed.

Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect

This paper analyzes the effects of both a permanent and a temporary deterioration In the terms of trade on a small open economy. The model, based on intertemporal optimization, emphasizes the labor-leisure choice and the role of capital accumulation There are two main conclusions to be drawn from the analysis. The first 1s that in all cases the transitional dynamics depends critically upon the long-run response of the capital stock to the deterioration m the terms of trade. This has been shown to consist of a substitution effect, which is negative, together with an income effect, which is positive. Secondly, since the steady state equilibrium depends upon the initla1 conditions of the economy, a temporary shock, by altering these initial conditions for some later date when the shock ceases, leads to a permanent effect on the economy. In the case where the substitution effect dominates, a deterioration in the terms of trade leads to a short-run reduction in investment and a short-run current account surplus, contrary to the Laursen-Metzler effect. However, when the long-run income effect dominates, the deterioration m the terms of trade leads to a short-run investment boom, accompanied by a short-term current account deficit. The Laursen-Metzler effect prevails, although it is driven by investment, rather than by savings behavior.