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The Transitional Dynamics of Fiscal Policy: Long-run Capital Accumulation and Growth

  • Stephen Turnovsky

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.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2002-22-P.

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Date of creation: Dec 2002
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Publication status: Published in Journal of Money, Credit, and Banking, Volume 36, 2004, 883-910
Handle: RePEc:udb:wpaper:uwec-2002-22-p
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