A New-Open-Economy Macro Model for Fiscal Policy Evaluation
IMF Working Papers, February 1, 2006
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- A New-Open-Economy Macro Model for Fiscal Policy Evaluation
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Bibliographic details
- Authors: Dirk V Muir, Douglas Laxton, Dennis P Botman, Andrei Romanov
- Published: February 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863055.001
Authors and publication
- By Dirk V Muir, Douglas Laxton, Dennis P Botman, Andrei Romanov
- February 1, 2006
- IMF Working Papers, Issue: 045, Series: Working Paper No. 2006/045
- Pages: 46
- Volume: 2006
- DOI: https://doi.org/10.5089/9781451863055.001
- Stock No: WPIEA2006045
- ISBN: 9781451863055
- ISSN: 1018-5941
Abstract / Core model setup
- The paper develops 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.
- The analysis considers a permanent increase in government debt following a cut in labor or corporate income taxes in a small and large open economy.
- The study analyzes sensitivity of results to the key structural parameters of the model.
- The authors argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt.
Key findings and projections
- Ricardian equivalence is violated in the model due to three explicit mechanisms listed above.
- Permanent increases in government debt, financed by cuts in labor or corporate income taxes, are examined in both small and large open economy settings.
- Under plausible parameter assumptions, the model yields significant crowding-out effects associated with permanent increases in government debt.
- The results are sensitive to key structural parameters (the paper analyzes this sensitivity; specific parameter values are in the full text).
Policy-relevant implications
- Fiscal policy that permanently increases government debt while cutting labor or corporate income taxes can lead to meaningful crowding-out effects.
- Policy evaluation in open economies should account for:
- distortionary taxation effects on behavior,
- the role of limited asset market participation,
- overlapping-generations dynamics that decouple current and future generations’ responses.
Subjects and keywords
- 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
Source: IMF Working Paper "A New-Open-Economy Macro Model for Fiscal Policy Evaluation", Dirk V Muir, Douglas Laxton, Dennis P Botman, Andrei Romanov, February 1, 2006 — https://www.imf.org/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840