Government finance and endogenous growth

Abstract

A crucial assumption for the solution of the endogenous growth model with government intervention is a balanced budget along the perpetual steady state. This assumption is unreal once we are interested to test the model using government data, given that in most countries the budget is not balanced. In this letter we adopt the well–known rule of ‘tax smoothing’ in order to make this assumption a realistic one. According to our approach the relevant variable for the implementation of a balanced budget is permanent government expenses. The empirical performance of the model is characterized using Israeli data.