Fiscal policy, adjustment costs, and endogenous growth

This paper develops a one-sector endogenous growth model in which investment incurs convex adjustment costs. Conditions for the existence of a balanced growth path are discussed. Fiscal issues are analyzed in a circumstance in which the government uses tax revenues to finance public expenditures that impact on both the productivity of the existing capital stock, and adjustments costs. The effect of these costs on the equilibrium growth rate and on the effectiveness of fiscal policy is discussed. Optimal fiscal policy is derived and the role of adjustment costs and congestion in determining the trade-off between different taxes is considered.