Fiscal Policy, Macroeconomic Stability and Finite Horizons
AbstractIn this paper we analyse the stabilisation properties of distortionary taxes in a New Keynesian model with overlapping generations of finitely-lived consumers. In this framework, government debt is part of net wealth and this adds a number of interesting channels through which fiscal policy could affect output and inflation. Output volatility, in presence of technology shocks, is not substantially affected by the operation of automatic stabilisers but we find interesting composition effects. While the presence of finitely-lived households strengthens the stabilisation performance of distortionary taxes through the reduction of the volatility of consumption, it does so at the cost of more volatile investment and real balances. These conflicting responses add up to a very small overall welfare losses associated with distortionary taxation.
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Bibliographic InfoPaper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2003_18.
Date of creation: Mar 2003
Date of revision: Oct 2003
Other versions of this item:
- Javier Andrés & Rafael Doménech & Campbell Leith, 2006. "Fiscal Policy, Macroeconomic Stability And Finite Horizons," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 72-89, 02.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
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