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The Effects of Fiscal Instruments on the Economy of Lithuania

Author

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  • Sigitas Karpavicius

    (University of New South Wales)

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.

Suggested Citation

  • Sigitas Karpavicius, 2009. "The Effects of Fiscal Instruments on the Economy of Lithuania," Bank of Lithuania Working Paper Series 4, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:4
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    References listed on IDEAS

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    1. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. 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 350-373, June.
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    4. 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.
    5. Steindl, Frank G, 1971. "A Simple Macroeconomic Model with a Government Budget Restraint: A Comment," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 675-679, May-June.
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    Cited by:

    1. Sonya Georgieva, 2021. "Fiscal Multipliers in Bulgaria and Central and Eastern Europe Countries," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 131-167.

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    More about this item

    Keywords

    fiscal policy; degree of self-financing of tax cuts; impact of tax cuts; government expenditure multiplier;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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