Working Paper: CEPR ID: DP1179
Authors: Willem H. Buiter; Kenneth M. Kletzer
Abstract: This paper considers the effects of fiscal and financial policy on economic growth in open and closed economies, when human capital formation by young households is constrained by the illiquidity of human wealth. Both endogenous and exogenous growth versions of the basic OLG model are analysed. We find that intergenerational redistribution policies that discourage physical capital formation may encourage human capital formation. Despite common technologies and perfect international mobility of financial capital, the non-tradedness of human capital and the illiquidity of human wealth make for persistent differences in productivity growth rates (in the endogenous growth version of the model) or in their levels (in the exogenous growth version). We also consider the productivity growth (or level) effects of public spending on education and of the distortionary taxation of financial asset income.
Keywords: capital mobility; fiscal policy; human capital; endogenous growth
JEL Codes: E62; F21; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intergenerational redistribution policies (H23) | human capital formation (J24) |
| public spending on education (H52) | human capital formation (J24) |
| taxing the middle-aged (H31) | public spending on education (H52) |
| intergenerational redistribution policies (H23) | physical capital formation (E22) |
| public spending on education (H52) | growth rate of human capital (J24) |
| physical capital to human capital ratio (J24) | growth rate of human capital (J24) |
| elasticity of output with respect to physical capital (E23) | human capital investment (J24) |