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Intertemporal Fiscal Policy in Macroeconomic Models: Introduction and Major Alternatives

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  • Ralph C. Bryant
  • Long Zhang

Abstract

The research reported in this set of three working papers focuses on different assumptions about the intertemporal behavior of government policymakers. In particular, we carefully study alternative specifications of intertemporal fiscal closure rules and their impacts on the effectiveness of macroeconomic policies. In this first paper, we introduce the subject, make general observations about policy reaction functions, and then identify the main possibilities for intertemporal fiscal closure rules. We concentrate on the alternative types of fiscal rule that have so far been introduced into existing empirical macroeconomic models. The second paper in the series uses a small growth model to study the theoretical implications of these intertemporal rules. A third paper describes a two-region empirical macroeconomic model based on the equations for the United States in the IMF staff's multicountry model, MULTIMOD, and reports simulation results of the alternative fiscal closure rules implemented in that abridgement of MULTIMOD. The research highlights the conclusion that, in a macroeconomic model of any type, the consequences for national economies of a shock or policy action can be significantly conditioned by the intertemporal fiscal reaction function used in the model. The point applies to all time horizons -- the short and medium runs as well as the long-run steady state. Builders and users of macroeconomic models thus need to pay more careful attention to fiscal reaction functions than they typically have in the past.

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Bibliographic Info

Paper provided by Brookings Institution International Economics in its series Discussion Papers with number 123.

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Date of creation: 1996
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Handle: RePEc:wop:briedp:123

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Cited by:
  1. Philippe Michel & Leopold Von Thadden & Jean-Pierre Vidal, 2010. "Debt Stabilizing Fiscal Rules," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(5), pages 923-941, October.
  2. Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, vol. 17(2), pages 171-193, April.
  3. Teresa Leal & Javier J. Pérez & Mika Tujula & Jean-Pierre Vidal, 2008. "Fiscal Forecasting: Lessons from the Literature and Challenges," Fiscal Studies, Institute for Fiscal Studies, vol. 29(3), pages 347-386, 09.
  4. Javier J. Pérez & Paul Hiebert, 2002. "Identifying endogenous fiscal policy rules for macroeconomic models," Economic Working Papers at Centro de Estudios Andaluces E2002/06, Centro de Estudios Andaluces.
  5. Pierre-Yves HENIN & Marie PODEVIN, 2002. "Assessing the Effects of Policy Changes: Lesson from the European 1992 Experience," Annales d'Economie et de Statistique, ENSAE, issue 67-68, pages 435-461.

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