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Implications of the slowdown in trend growth for fiscal policy in a small open economy

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  • Alexander Beames
  • Mariano Kulish
  • Nadine Yamout

Abstract

We set up and estimate a small open economy model with fiscal policy in which trend growth can permanently change. The magnitude and timing of the change in trend growth are estimated alongside the structural and fiscal policy rule parameters. Around 2003:Q3, trend growth in per capita output is estimated to have fallen from just over 2 per cent to 0.6 per cent annually. The slowdown brings about a lasting transition which in the short-run decreases consumption tax revenues but increases them in the long-run changing permanently the composition of tax revenues and temporarily increasing the government debt-to-output ratio.

Suggested Citation

  • Alexander Beames & Mariano Kulish & Nadine Yamout, 2021. "Implications of the slowdown in trend growth for fiscal policy in a small open economy," CAMA Working Papers 2021-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-18
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    More about this item

    Keywords

    Open economy; trend growth; fiscal policy; real business cycles; estimation; structural breaks;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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