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The goal of this paper is to demonstrate that a standard model of endogenous growth with learning by doing may produce a rich variety of possible outcomes. Starting point of our analysis is the Romer (1986a) approach. In contrast to Romer, however, we assume that one unit of investment shows different effects concerning the building up of physical and human capital, so that these variables cannot be merged into one single variable. With this assumption, it can be shown that multiple steady states, indeterminacy of equilibria and persistent cycles may result in our model.
In this paper we analyze growth and welfare effects of fiscal policy in an endogenous growth model along the balanced growth path. As to the model we assume that sustained per capita growth results from public investment. The government uses its tax income for investment in public capital, for investment subsidy and for transfer payments. It is shown that there exists a growth maximizing income tax rate and a growth maximizing investment subsidy whereas increasing transfer payments always reduces economic growth. Further, a tax on consumption raises the balanced growth rate if the additional tax income is used for public investment. Moreover, we demonstrate that maximizing economic growth is not equivalent to maximizing welfare and we derive the values of the fiscal parameters which maximize welfare.
