Private Investment and Endogenous Fiscal Policy. Theory and Evidence from UK and USA.

This paper continues the study of endogenous fiscal policy, using a framework where both capital taxes and government spending are determined optimally. The paper examines the interaction between private investors and fiscal authorities. It specifies the circumstances under which public debt stabilization is based more upon tax increases than government consumption cuts, and shows how private investment depends on the stabilization package. The predictions of the model about the joint determination of private capital accumulation, taxation and government consumption are tested on UK and USA annual data.