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The Effects of Fiscal Instruments on the Economy of Lithuania

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  • Sigitas Karpavicius

    ()
    (University of New South Wales)

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    Abstract

    The goal of this paper is to examine the dynamic effects of fiscal instruments in Lithuania on the economy and welfare. In the analysis, a calibrated dynamic stochastic general equilibrium model for Lithuania is employed. The calculation implies that 9-16 percent of tax cuts are self-financing in the long run. It suggests that the slope of Laffer curve in Lithuanian economy is rather flat. The analysis of effects of different tax cuts shows that the impact of 1 percentage point permanent decrease in statutory tax rate on gross domestic product is very small (within the range of –0.15 through 0.15 percent in all cases). The estimated government expenditure multiplier has a different sign in the long run when various financing sources are used to balance the government budget.

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    File URL: http://www.lb.lt/wp2009_no_4
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    Bibliographic Info

    Paper provided by Bank of Lithuania in its series Bank of Lithuania Working Paper Series with number 4.

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    Length: 34 pages
    Date of creation: 20 Apr 2009
    Date of revision:
    Handle: RePEc:lie:wpaper:4

    Contact details of provider:
    Postal: Bank of Lithuania Gedimino pr. 6, LT-01103 Vilnius, Lithuania
    Phone: 22 40 08
    Fax: 22 15 01
    Email:
    Web page: http://www.lbank.lt/
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    Related research

    Keywords: fiscal policy; degree of self-financing of tax cuts; impact of tax cuts; government expenditure multiplier;

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    References

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    1. Chamley, Christophe, 1985. "Efficient Tax Reform in a Dynamic Model of General Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 335-56, May.
    2. Trabandt, Mathias & Uhlig, Harald, 2010. "How far are we from the slippery slope? The Laffer curve revisited," Working Paper Series 1174, European Central Bank.
    3. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers.
    4. Devereux, Michael B & Love, David R F, 1995. "The Dynamic Effects of Government Spending Policies in a Two-Sector Endogenous Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 232-56, February.
    5. Niels Arne Dam & Jesper Gregers Linaa, 2005. "What Drives Business Cycles in a Small Open Economy with a Fixed Exchange Rate?," EPRU Working Paper Series 05-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    6. Cardia, Emanuela & Kozhaya, Norma & Ruge-Murcia, Francisco J, 2003. " Distortionary Taxation and Labor Supply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 350-73, June.
    7. Sigitas Karpavicius & Igor Vetlov, 2008. "Personal Income Tax Reform in Lithuania: Macroeconomic and Welfare Implications," Bank of Lithuania Working Paper Series 2, Bank of Lithuania.
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