A New-Open-Economy Macro Model for Fiscal Policy Evaluation

Author/Editor:

Dirk V Muir ; Douglas Laxton ; Dennis P Botman ; Andrei Romanov

Publication Date:

February 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 06/45

Subject:

English

Publication Date:

February 1, 2006

ISBN/ISSN:

9781451863055/1018-5941

Stock No:

WPIEA2006045

Format:

Paper

Pages:

46

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