Fiscal policy in an endogenous growth model with public capital: How important are transition dynamics?

This paper studies growth and welfare effects of fiscal policy in an endogenous growth model with productive public capital where we consider both distortionary and non-distortionary taxation in the model simultaneously. Analyzing the model it is assumed that the economy originally is on the balanced growth path when the government changes its fiscal parameters. The paper then studies growth and welfare effects of varying fiscal parameters both for the balanced growth path as well as for the economy on the transition path. It is demonstrated that the longrun effects may be different from effects on the transition path. Further, economic conditions explaining the results are presented. JEL: E62, O41