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A New-Open-Economy Macro Model for Fiscal Policy Evaluation

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Author Info

  • Dirk Muir
  • Douglas Laxton
  • Dennis P. J. Botman
  • Andrei Romanov

Abstract

We develop a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of (i) distortionary labor and corporate income taxation; (ii) limited asset market participation; and (iii) because the overlapping-generations structure results in a disconnect between current and future generations. We consider a permanent increase in government debt following a cut in labor or corporate income taxes in a small and large open economy. We analyze the sensitivity of the results to the key structural parameters of the model and argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/45.

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Length: 46
Date of creation: 01 Feb 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/45

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Related research

Keywords: Public debt; Economic models; government debt; elasticity of substitution; open economy; current account; current account balance; debt ratio; world economy; dynamic effects; aggregate consumption; tradable goods; political economy; trade deficit; terms of trade; distortionary taxes; current account deficit; net debtor; perfect competition; central bank; current account deficits; investment flows; government deficits; reserve bank; debt servicing; international trade; equilibrium model; international borrowing; trade flows; policy regimes; imported good; intermediate goods; exchange rate regimes; debt public; national debt; debt management; asset market; international lending; trade deficits; domestic demand;

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References

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