The transitional dynamics of fiscal policy: Long-run capital accumulation and growth

This paper analyzes the effects of fiscal policies in a non-scale growing economy with public and private capital. The equilibrium dynamics are characterized and we contrast the dynamic effects of government expenditure on investment and expenditure on consumption under four alternative modes of tax financing. Most of our attention focuses on the numerical simulations of a calibrated economy. The results emphasize the lengthy transition periods, which implies that policies have sizeable level effects, leading to substantial welfare effects, even though long-run growth rates are unaffected. The paper highlights the intertemporal dimensions of fiscal policy and the tradeoffs these involve for economic performance, especially growth and welfare.