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Mr. Ricardo's Great Adventure

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  • Silvia Sgherri
  • Tamim Bayoumi

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 International Monetary Fund in its series IMF Working Papers with number 06/168.

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Length: 30
Date of creation: 01 Jul 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/168

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Keywords: Discount rates; Income; Interest rates; Taxes; equation; fiscal policy; instrumental variables; fiscal multipliers; tax cut; government spending; tax cuts; budget constraint; random walk; probability; fiscal contractions; equations; fiscal consolidation; tax changes; time series; tax increases; instrumental variable; independent variables; tax rates; tax policy; budget deficit; standard deviations; tax base; significance level; expansionary fiscal contractions; fiscal policy on consumption; statistics; fiscal model; vector autoregression; logarithm; correlation; expansionary fiscal; predictions; general equilibrium models; general equilibrium ? models; aggregate demand; tax reform; general equilibrium model; fiscal policies; tax wedge; fiscal consolidations;

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Citations

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Cited by:
  1. Karsten Staehr, 2007. "Fiscal Policies and Business Cycles in an Enlarged Euro Area," CESifo Working Paper Series 1933, CESifo Group Munich.
  2. Barbara Annicchiarico & Nicola Giammaroli & Alessandro Piergallini, 2011. "Budgetary Policies in a DSGE Model with Finite Horizons," CEIS Research Paper 207, Tor Vergata University, CEIS, revised 12 Jul 2011.
  3. Silvia Sgherri & Tamim Bayoumi, 2009. "On Impatience and Policy Effectiveness," IMF Working Papers 09/18, International Monetary Fund.
  4. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances," IMF Working Papers 07/4, International Monetary Fund.

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