Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity

Abstract

This paper constructs a tractable model of endogenous growth with financial frictions and firm heterogeneity. We introduce factor income tax, consumption tax as well as the government consumption into the base model and explore the growth effect of fiscal policy. We show that from the qualitative perspective, the long-run effects of fiscal actions in our model are similar to those obtained in the representative-agent models. However, the quantitative impacts of fiscal policy on long-run growth in our setting can be substantially different from those established in the model where agents are homogeneous and there is no financial friction.