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Fiscal Policy in an Open Economy

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  • Friedman, Amit
  • Hercowitz, Zvi
  • Sidi, Jonathan

Abstract

This paper analyzes the quantitative macroeconomic implications of a fiscal policy regime based on exogenous tax rates paths and public debt/GDP target in an open economy. In this setup, government spending accommodates tax revenues and target deficits. In particular, we concentrate on pre-announced tax cuts, as well as on the adoption of a lower debt target – following policies conducted in Israel during the 2000s. We construct a model where domestic production requires imported inputs, and simulate the effects of these policies. The analysis focuses on the dynamics generated by the announcements of these policy steps, followed by their implementation. The model has the implication that a credible announcement of a future tax cut has an expansionary effect on impact, similar in nature to the effects of productivity shocks. Also, the model implies that the announcement of a lower public debt/GDP target has a contractionary effect, while it’s implementation leads to higher output in the long-run.
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Suggested Citation

  • Friedman, Amit & Hercowitz, Zvi & Sidi, Jonathan, 2012. "Fiscal Policy in an Open Economy," Foerder Institute for Economic Research Working Papers 275772, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275772
    DOI: 10.22004/ag.econ.275772
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    References listed on IDEAS

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    3. Friedman, Amit & Hercowitz, Zvi, 2010. "A Real Model of the Israeli Economy," Foerder Institute for Economic Research Working Papers 275734, Tel-Aviv University > Foerder Institute for Economic Research.
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    5. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1, March.
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    Financial Economics; Public Economics;

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