Economic growth and fiscal policy

Having explicitly examined the influence of fiscal policy on short-term interest rate dynamics and the term structure of interest rates in the last two chapters, we now want to turn to the second main question to be addressed within our model: how do fiscal policy and financial market interactions influence the evolution of output, income and hence economic growth? Since we already mentioned in Chapter 3 that our production function is known to produce endogenous growth, the question here is not whether growth reaches a steady state or not. The question is rather: does the interaction between interest rate dynamics and fiscal policy imply positive or negative growth rates in average? And are growth rates accelerating like in the deterministic setting (which did not automatically imply that they are positive)? Recalling the discussion in the introductory chapter, it is our aim to show that growth does not evolve independent of financial markets and fiscal policy settings.