Optimal Fiscal Policy in the Uzawa-Lucas Model with CES Production

Abstract

[Abstract]: This paper devises an endogenous growth model with human capital in the UzawaLucas framework in which the average human capital has a positive external effect on the goods sector. Unlike previous works, this paper assumes that output is produced with a CES technology and analyzes the existence, uniqueness, and stability of equilibrium. Also, a fiscal policy is devised that is capable of providing the required incentives to optimize the competitive equilibrium. In order to correct the market failure caused by the externality, the authors introduce a subsidy to human capital and analyze how it can be financed in an optimal way. Some simulation results are presented.(JEL O41, E62)