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Endogenous Government Spending and Ricardian Equivalence

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  • Bohn, Henning

Abstract

Many analyses of debt policy assume exogenous government expenditures. Instead, the author uses an optimizing model in which the government endogenously selects values of taxes, spending, and debt to maximize welfare. If demand for publicly provided goods is elastic, a debt-financed tax cut increases consumption because individuals rationally expect some reduced government spending in the future. Even though future taxes rise, they do not offset the expansionary effect of the current tax cut on consumption. Depending on preferences, the marginal propensity to consume out of tax cuts can take any value between zero and the marginal propensity out of ordinary income. Copyright 1992 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 102 (1992)
Issue (Month): 412 (May)
Pages: 588-97

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Handle: RePEc:ecj:econjl:v:102:y:1992:i:412:p:588-97

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Cited by:
  1. Kollintzas, Tryphon & Philippopoulos, Apostolis & Vassilatos, Vanghelis, 1999. "Normative Aspects of Fiscal Policy in an Economic Union: a Review," CEPR Discussion Papers 2212, C.E.P.R. Discussion Papers.
  2. Christopher Reicher, 2011. "An Estimated Fiscal Taylor Rule for the Postwar United States," Kiel Working Papers 1705, Kiel Institute for the World Economy.
  3. Christina D. Romer & David H. Romer, 2007. "Do Tax Cuts Starve the Beast: The Effect of Tax Changes on Government Spending," NBER Working Papers 13548, National Bureau of Economic Research, Inc.
  4. repec:dgr:uvatin:2010100 is not listed on IDEAS
  5. George W. Evans & Seppo Honkapohja & Kaushik Mitra, 2012. "Does Ricardian Equivalence Hold When Expectations Are Not Rational?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1259-1283, October.
  6. Issler, Joao Victor & Lima, Luiz Renato, 2000. "Public debt sustainability and endogenous seigniorage in Brazil: time-series evidence from 1947-1992," Journal of Development Economics, Elsevier, vol. 62(1), pages 131-147, June.
  7. Christopher Reicher, 2009. "Fiscal Taylor Rules in the Postwar United States," Kiel Working Papers 1509, Kiel Institute for the World Economy.
  8. Gary B. Gorton & Guillermo OrdoƱez, 2013. "The Supply and Demand for Safe Assets," NBER Working Papers 18732, National Bureau of Economic Research, Inc.
  9. Reicher, Claire, 2014. "Systematic fiscal policy and macroeconomic performance: A critical overview of the literature," Economics Discussion Papers 2014-29, Kiel Institute for the World Economy.

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