FISCAL SETTINGS AND THE STEADY-STATE GROWTH PATH

This paper outlines how deficit-neutral fiscal settings, via their imp act on the growth/distribution equation, can play a positive role in m inimizing deviant macroeconomic performance. The conventional Solow-Sw an model of economic growth assigns no role to the standard instrument s of fiscal policy in influencing the equilibrium growth path. In the model presented here, government fiscal policy-in the form of tax and transfer rates-is shown to have real effects on the long-term growth p ath of the unionized macroeconomy, even when the budget is permanently balanced and policy is fully announced.