This paper develops a one-sector endogenous growth model in which inve
stment incurs convex adjustment costs. Conditions for the existence of
a balanced growth path are discussed. Fiscal issues are analyzed in a
circumstance in which the government uses tax revenues to finance pub
lic expenditures that impact on both the productivity of the existing
capital stock, and adjustments costs. The effect of these costs on the
equilibrium growth rate and on the effectiveness of fiscal policy is
discussed. Optimal fiscal policy is derived and the role of adjustment
costs and congestion in determining the trade-off between different t
axes is considered.