FISCAL-POLICY, GROWTH, AND MACROECONOMIC PERFORMANCE IN A SMALL OPEN-ECONOMY

This paper develops an endogenous growth model of a small open economy . Domestic capital accumulation involves convex costs of adjustment, a consequence of which is that no steady-state growth path may exist. T he equilibrium growth rates of domestic capital and consumption are de termined largely independently. The former is determined by production conditions, the latter is determined primarily by tastes. Various fis cal issues are discussed, beginning with the effects of taxes on growt h and welfare. The latter part of the paper discusses optimal fiscal p olicy in a situation where the tax revenues are used to finance utilit y-augmenting government expenditure.