A New-Open-Economy Macro Model for Fiscal Policy Evaluation
February 1, 2006
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Summary
We develop a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of (i) distortionary labor and corporate income taxation; (ii) limited asset market participation; and (iii) because the overlapping-generations structure results in a disconnect between current and future generations. We consider a permanent increase in government debt following a cut in labor or corporate income taxes in a small and large open economy. We analyze the sensitivity of the results to the key structural parameters of the model and argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt.
Subject: Consumption, Financial services, Labor, Labor taxes, National accounts, Public debt, Real interest rates, Taxes
Keywords: Consumption, consumption function, crowding-out effect, debt ratio, distortionary taxes, Finite lives, fiscal policy, Global, government debt, home economy, Labor taxes, open economy, Real interest rates, rule-of-thumb consumer, rule-of-thumb consumers, WP
Pages:
46
Volume:
2006
DOI:
Issue:
045
Series:
Working Paper No. 2006/045
Stock No:
WPIEA2006045
ISBN:
9781451863055
ISSN:
1018-5941
