This paper sets up a theoretical model linking the growth rate of the economy to the growth rate and volatility of different government expenditures. On a theoretical basis, it is found that volatility in government spending can be positively or negatively associated with economic growth depending on the intertemporal elasticity in consumption. On an empirical basis, it is rather surprising to find no association between growth in capital expenditure and output growth, whereas growth in current expenditure seems to stimulate output growth. In particular, growth in transportation and communication seems to have a negative effect on output growth. It is also very interesting to find that the rises in the volatility in the growth of general public services, transportation, and communication have a positive effect on output growth.

In this paper, we study the optimal choices of the federal income tax, federal transfers, and local taxes in a dynamic model of capital accumulation and with explicit gamestructure s among multipleprivateage nts, multiplelocal governments, and the federal government. In general, the optimal local property tax is zero if the local property tax is constrained to be nonnegative, whereas the optimal local consumption tax is always positive. When the local consumption tax is chosen optimally, the federal income tax can be either positive or negative. For most reasonable parameter values, our numerical calculations have shown that with a positive local consumption tax there exists a reverse transfer from local governments to the federal government.

In this paper, we consider social status, the spirit of capitalism, fiscal policies, and asset pricing in a stochastic model of growth. With specific assumptions on the production technology, preferences, and stochastic shocks, we derive the explicit solutions to the growth rates of consumption and savings and equilibrium returns on all assets. We further demonstrate how fiscal policies, the spirit of capitalism, and stochastic shocks affect growth, asset pricing, and welfare.