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The effects of fiscal policy in a neoclassical growth model

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  • Michael Dotsey
  • Ching Sheng Mo
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    Abstract

    This paper studies the effects of fiscal policies--depicted as stochastic changes in government spending and distortionary tax rates--when the government is constrained from using lump sum taxes for achieving intertemporal budget balance. The ratio of debt to gnp, therefore, has consequences for the future choices of government spending and distortionary taxation and hence affects real economic activity. Further modeling fiscal policy in this way generates results that differ substantially from those in standard stochastic models where lump sum taxes are used for budget balance. The modeling of fiscal policy presented here is also consistent with empirical evidence on U.S. fiscal policy.

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    File URL: http://www.richmondfed.org/publications/research/working_papers/1994/pdf/wp94-3.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 94-03.

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    Date of creation: 1994
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    Handle: RePEc:fip:fedrwp:94-03

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    Keywords: Fiscal policy;

    References

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    1. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    2. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
    3. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Working Papers 456, Federal Reserve Bank of Minneapolis.
    4. Danthine, Jean-Pierre & Donaldson, John B., 1985. "A note on the effects of capital income taxation on the dynamics of a competitive economy," Journal of Public Economics, Elsevier, vol. 28(2), pages 255-265, November.
    5. Barro, Robert J. & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," Scholarly Articles 3451298, Harvard University Department of Economics.
    6. Baxter, Marianne, 1991. "Approximating suboptimal dynamic equilibria : An Euler equation approach," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 173-200, October.
    7. Dotsey, Michael, 1990. "The Economic Effects of Production Taxes in a Stochastic Growth Model," American Economic Review, American Economic Association, vol. 80(5), pages 1168-82, December.
    8. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373.
    9. Becker, Robert A., 1985. "Capital income taxation and perfect foresight," Journal of Public Economics, Elsevier, vol. 26(2), pages 147-167, March.
    10. Henning Bohn, . "On Testing Sustainability of Government Deficits in a Stochastic Environment," Rodney L. White Center for Financial Research Working Papers 19-91, Wharton School Rodney L. White Center for Financial Research.
    11. Wilbur John Coleman II, 1989. "An algorithm to solve dynamic models," International Finance Discussion Papers 351, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Kevin J. Lansing, 1995. "Optimal fiscal policy when public capital is productive: a business cycle perspective," Working Paper 9507, Federal Reserve Bank of Cleveland.
    2. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August.

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