{
  "title": "A New-Open-Economy Macro Model for Fiscal Policy Evaluation",
  "publication": "IMF Working Papers, February 1, 2006",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840",
  "overlayPath": "/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840/index.md",
  "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",
  "sections": [
    {
      "heading": "Authors and publication",
      "content": "- By Dirk V Muir, Douglas Laxton, Dennis P Botman, Andrei Romanov\n- February 1, 2006\n- IMF Working Papers, Issue: 045, Series: Working Paper No. 2006/045\n- Pages: 46\n- Volume: 2006\n- DOI: https://doi.org/10.5089/9781451863055.001\n- Stock No: WPIEA2006045\n- ISBN: 9781451863055\n- ISSN: 1018-5941"
    },
    {
      "heading": "Abstract / Core model setup",
      "content": "- The paper develops a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of:\n  - (i) distortionary labor and corporate income taxation;\n  - (ii) limited asset market participation; and\n  - (iii) because the overlapping-generations structure results in a disconnect between current and future generations.\n- 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.\n- The study analyzes sensitivity of results to the key structural parameters of the model.\n- The authors argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt."
    },
    {
      "heading": "Key findings and projections",
      "content": "- Ricardian equivalence is violated in the model due to three explicit mechanisms listed above.\n- Permanent increases in government debt, financed by cuts in labor or corporate income taxes, are examined in both small and large open economy settings.\n- Under plausible parameter assumptions, the model yields significant crowding-out effects associated with permanent increases in government debt.\n- The results are sensitive to key structural parameters (the paper analyzes this sensitivity; specific parameter values are in the full text)."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Fiscal policy that permanently increases government debt while cutting labor or corporate income taxes can lead to meaningful crowding-out effects.\n- Policy evaluation in open economies should account for:\n  - distortionary taxation effects on behavior,\n  - the role of limited asset market participation,\n  - overlapping-generations dynamics that decouple current and future generations’ responses."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subject: Consumption, Financial services, Labor, Labor taxes, National accounts, Public debt, Real interest rates, Taxes\n- 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\n\nSource: 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\n\n---\n\n Content in this bundle\n\n- wp0645\n  - wp0645 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp0645 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840/bundle-manifest.json)",
    "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",
    "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",
    "The paper develops a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of:",
    "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.",
    "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).",
    "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:",
    "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",
    "**_wp0645**"
  ],
  "related": [
    {
      "title": "_wp0645",
      "role": "document",
      "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp0645.pdf",
      "summary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp0645.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp0645.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840/index.md",
    "json": "/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840/index.json",
    "bundleManifest": "/en/publications/wp/issues/2016/12/31/a-new-open-economy-macro-model-for-fiscal-policy-evaluation-18840/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-17T08:31:36.855Z"
}