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Estimating the effects of fiscal policy under the budget constraint

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  • Peter Claeys

    ()
    (Faculty of Economics, University of Barcelona.)

Abstract

I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The results overturn some widely held beliefs on fiscal policy effects. The main finding is that expansionary fiscal policy has contractionary effects on output and inflation. Ricardian effects may dominate when fiscal expansions are expected to be adjusted by future tax rises or spending cuts. The evidence supports RBC models with distortionary taxation. We can discard some alternative interpretations that are based on monetary policy reactions or supply-side effects.

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Bibliographic Info

Paper provided by University of Barcelona, Research Institute of Applied Economics in its series IREA Working Papers with number 200715.

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Length: 45 pages
Date of creation: Jul 2007
Date of revision: Jul 2007
Handle: RePEc:ira:wpaper:200715

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Keywords: fiscal policy; sustainability; spending; taxes; common trends; SVAR.;

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Cited by:
  1. Artis, Michael J & Miguélez, Ernest & Moreno, Rosina, 2009. "Assessing agglomeration economies in a spatial framework with endogenous regressors," CEPR Discussion Papers 7267, C.E.P.R. Discussion Papers.
  2. Juan Luis Jiménez & Jordi Perdiguero & Ancor Suárez, 2011. "Debating as a classroom tool for adapting learning outcomes to the European higher education area," IREA Working Papers 201109, University of Barcelona, Research Institute of Applied Economics, revised Jun 2011.

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