GROWING THROUGH SUBSIDIES

...We rely on Matsuyama (1996, 1999) to study the effects on growth and welfareof non distortive tax/subsidy policies. In particular, we are interested ininvestigating the stabilising/destabilising effects of policies aimed at eliminatingeconomic fluctuations. The focus on stabilisation originates from the observationthat nations and governments aim to reach high permanent growth withoutincurring recessions. We concentrate our attention on the issue of how subsidisinginnovators (and taxing consumers) can generate stable sustained growthand higher welfare.In this respect, our paper can be seen as a reformulation in a macroeconomiccontext of the branch of the R&D literature that deals with public aid to innovation(see e.g. Aghion and Howitt (1992), Davidson and Segerstrom (1998)and Segerstrom (2000)). In this literature it is often claimed that there existsa role for public intervention both in subsidising R&D activities and enforcingproperty rights to innovation as means to promote economic growth. ...