DP1179 Capital Mobility, Fiscal Policy and Growth Under Self-Financing of Human Capital Formation

Author(s): Willem H. Buiter, Kenneth Kletzer
Publication Date: May 1995
Keyword(s): Capital Mobility, Endogenous Growth, Fiscal Policy, Human Capital
JEL(s): E62, F21, F43
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1179

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.