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Mr Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model

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  • Bayoumi, Tamim
  • Sgherri, Silvia

Abstract

We estimate tax multipliers in a "Blanchard-Yaari" consumption model where Ricardian equivalence is broken because the private sector discounts the future at a faster rate than the real rate of interest. The model fits U.S. data since 1955 extremely well-entailing a discount wedge of around 20 percent a year and fiscal multipliers of 0.15-0.4-depending on the permanence of the change in taxes/transfers, and is much superior to one that assumes some consumers are fully Ricardian and others follow simple rules of thumb. The implied high private sector rate of discount has wide implications for policymakers.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5839.

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Date of creation: Sep 2006
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Handle: RePEc:cpr:ceprdp:5839

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Keywords: discount rates; fiscal multipliers; fiscal policy; Ricardian equivalence;

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References

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  1. Jordi Galí & J. David López-Salido & Javier Vallés, 2005. "Understanding the Effects of Government Spending on Consumption," NBER Working Papers 11578, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Gabriela Lopes de Castro & José R. Maria & Ricardo Mourinho Félix & Cláudia Braz, 2013. "Ageing and fiscal sustainability in a small euro area economy," Working Papers w201304, Banco de Portugal, Economics and Research Department.
  2. Vanda Almeida & Gabriela Castro & Ricardo Félix, 2010. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," Portuguese Economic Journal, Springer, vol. 9(3), pages 163-193, December.
  3. Staehr, Karsten, 2008. "Fiscal policies and business cycles in an enlarged euro area," Economic Systems, Elsevier, vol. 32(1), pages 46-69, March.
  4. Alun H. Thomas & Tamim Bayoumi, 2009. "Today Versus tomorrow," IMF Working Papers 09/248, International Monetary Fund.
  5. Silvia Sgherri & Tamim Bayoumi, 2009. "On Impatience and Policy Effectiveness," IMF Working Papers 09/18, International Monetary Fund.
  6. Annicchiarico, Barbara & Giammarioli, Nicola & Piergallini, Alessandro, 2009. "Budgetary Policies in a DSGE Model with Finite Horizons," MPRA Paper 12650, University Library of Munich, Germany.
  7. Brittle, Shane, 2009. "Ricardian Equivalence and the Efficacy of Fiscal Policy in Australia," Economics Working Papers wp09-10, School of Economics, University of Wollongong, NSW, Australia.
  8. Daniel Leigh, 2008. "Achieving a Soft Landing," IMF Working Papers 08/69, International Monetary Fund.
  9. Michael Kumhof & Douglas Laxton, 2009. "Fiscal Deficits and Current Account Deficits," IMF Working Papers 09/237, International Monetary Fund.
  10. Kumhof, Michael & Laxton, Douglas & Leigh, Daniel, 2014. "To starve or not to starve the beast?," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 1-23.
  11. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover?on the Effects of U.S. Government Deficits," IMF Working Papers 07/202, International Monetary Fund.
  12. Gabriela Lopes de Castro & Ricardo Mourinho Félix & Paulo Júlio & José R. Maria, 2013. "Fiscal multipliers in a small euro area economy: How big can they get in crisis times?," Working Papers w201311, Banco de Portugal, Economics and Research Department.
  13. Tamim Bayoumi & Silvia Sgherri, 2007. "On the Impact of Income and Policy Shocks on Consumption," DNB Working Papers 152, Netherlands Central Bank, Research Department.
  14. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances," IMF Working Papers 07/4, International Monetary Fund.

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