Government Fiscal Policy And Stochastic Economic Growth

Government has multi-aspect functions in the social economy system, for instance: imposing, issuing bonds and government public expenditure etc. In this paper, we develop three continuous-time stochastic models of endogenous economic growth considering government, and discuss the effect of fiscal policy to macroeconomic and social welfare. First, considering government expenditure under uncertainty, the average level of government consumption expenditure appears in the utility function of representative agent multiplicatively with private consumption and with a constant elasticity. And the average level of government productive expenditure is introduced to production function. Government expenditure encompasses productive and consumptive expenditure. The paper develops a stochastic model of endogenous growth with the assumption. By the method of dynamic optimization, the macroeconomic equilibrium is derived. And then, the model is used to analyze the macroeconomic effects of government expenditure and stochastic disturbance on economic growth. The optimal size of government is derived. Second, adopting non-expected utility in which the intertemporal substitution elasticity and relative risk aversion coefficient is relatively independent, the paper develops a stochastic model of endogenous economic growth with government productive expenditure. By the method of stochastic optimization, the consumption-capital ratio and stochastic growth rate of economy are derived in the equilibrium state. And then, this paper examines the effects of stochastic productive shocks, average after-tax capital return and income taxation on economic growth, consumption-capital ratio and social welfare. The expression of optimal income tax rate is educed. Finally, under the circumstance of government issuing bonds with uncertainty return and stochastic income taxation, the paper employs a stochastic growth model based on the second model. Stochastic real return rate of bond is determined endogenously. After deducing the equilibrium, the paper discusses the macroeconomic effects of fiscal policy and stochastic disturbance on economic growth and consumption prefer. This paper studies economic growth in an uncertain environment. The final conclusions are important for the government to make fiscal policies.