Short-Run Effects of Fiscal Policy with Forward-Looking Financial Markets
AbstractWe explore the short-run effects of fiscal policy using simulations of an empirical, rational-expectations, open-economy macromodel developed at the Federal Reserve Board. Based on this model, we find that tax cuts and spending increases generally stimulate economic activity in the short run, contrary to the extreme view that forward-looking financial markets more than offset the direct expansionary impulse of those actions. However, the magnitude of the stimulus is greatly attenuated by the financial-market feedback. For example, a sustained cut in personal income taxes raises output by less than the amount of the tax cut itself, and it likely reduces output (relative to baseline) in the first several years if phased in gradually over time. Our results also show that the estimated stimulus imparted by fiscal policy is sensitive to reasonable variation in the model’s parameters.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by National Tax Association in its journal National Tax Journal.
Volume (Year): 55 (2002)
Issue (Month): 3 (September)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christopher D. Carroll, 2001.
"A Theory of the Consumption Function, With and Without Liquidity Constraints (Expanded Version),"
NBER Working Papers
8387, National Bureau of Economic Research, Inc.
- Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
- Christopher D. Carroll, 2001. "Codes for A Theory of the Consumption Function, With and Without Liquidity Constraints," QM&RBC Codes 37, Quantitative Macroeconomics & Real Business Cycles.
- Shapiro, Matthew D & Slemrod, Joel, 1995.
"Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding,"
American Economic Review,
American Economic Association, vol. 85(1), pages 274-83, March.
- Matthew D. Shapiro & Joel Slemrod, 1993. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," NBER Working Papers 4344, National Bureau of Economic Research, Inc.
- Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
- Afonso, António & Martins, Manuel M.F., 2012.
"Level, slope, curvature of the sovereign yield curve, and fiscal behaviour,"
Journal of Banking & Finance,
Elsevier, vol. 36(6), pages 1789-1807.
- Afonso, António & Martins, Manuel M.F., 2010. "Level, slope, curvature of the sovereign yield curve, and fiscal behaviour," Working Paper Series 1276, European Central Bank.
- Edge, Rochelle M. & Rudd, Jeremy B., 2011. "General-equilibrium effects of investment tax incentives," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 564-577.
- Blanchard, Olivier J & Cottarelli, Carlo & Spilimbergo, Antonio & Symansky, Steven, 2009.
"Fiscal Policy for the Crisis,"
CEPR Discussion Papers
7130, C.E.P.R. Discussion Papers.
- David L. Reifschneider & John M. Roberts, 2005. "Expectations formation and the effectiveness of strategies for limiting the consequences of the zero bound on interest rates," Finance and Economics Discussion Series 2005-70, Board of Governors of the Federal Reserve System (U.S.).
- Martin Feldstein, 2002. "The Role for Discretionary Fiscal Policy in a Low Interest Rate Environment," NBER Working Papers 9203, National Bureau of Economic Research, Inc.
- Benjamin M. Friedman, 2005. "Deficits and Debt in the Short and Long Run," NBER Working Papers 11630, National Bureau of Economic Research, Inc.
- Diego E. Vacaflores, 2013. "Monetary Transfers in the U.S.: How Efficient Are Tax Rebates?," Economies, MDPI, Open Access Journal, vol. 1(3), pages 26-48, November.
- William Gale & Peter Orszag, 2005. "Economic Effects of Making the 2001 and 2003 Tax Cuts Permanent," International Tax and Public Finance, Springer, vol. 12(2), pages 193-232, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Charmaine Wright).
If references are entirely missing, you can add them using this form.